Herman Miller Earnings Call Nuggets: Project Activity, Customer Visits
On Thursday, Herman Miller, Inc. (NASDAQ:MLHR) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Budd Bugatch – Raymond James: I guess I understand much on the pension and I actually agree with your actions. So I’m not going to concentrate my questions on that. I really want to talk a little bit about revenues and what you see going forward now with the ABI turning a challenging positive territory and talk about customer visits and what you’re seeing in terms of project versus day-to-day business and maybe if you can separate that between I guess what you would call the core and even with healthcare and healthcare and government and kind of give us a feel of what the future looks like over maybe the next six months or 12 months from your view?
Brian C. Walker – President and CEO: Jeff, you want to start maybe giving some of that background statistic stuff and then we’ll try to put color it, make sure we’ve got the numbers out there for everybody.
Jeffrey M. Stutz – Treasurer and VP, IR: Sure Budd, in total customer visits, we were flat year-to-year in the quarter, pretty even. I don’t have off the top of my head the breakdown between the different sectors. Certainly we can follow-up with you after the call. I’ll have to look that up.
Brian C. Walker – President and CEO: Project activity versus (none).
Jeffrey M. Stutz – Treasurer and VP, IR: Total project activity we were 44% mix, so not altogether different than where we were I think last year at this time. We were 47% we estimated and about similar – about 45% last quarter. So, it hasn’t changed a great deal.
Brian C. Walker – President and CEO: Budd, it’s Brian. I’ll just add some kind of mere qualitative stuff around that. I think we’re always in this period of time where it’s a little harder to get a – and you’ve been around a long time, so you know it’s harder in this kind of three month window to get a great view about where the next year is going to be, because it gets so bumpy around the Christmas holidays and we always go into this period, Gregg and I laugh every year and say December, January, we’re going to be really nervous. We’ll feel a little better in February. We’ll get to March before we really know where things are going. Certainly this year was no different than that typical pattern that when you look at it overall, it’s certainly been flat. My gut still and this is much more of a feeling is that we’re feeling as an industry two macro things that have cooled the industry down a little bit. First of all maybe three, first of all I think the bounce off the bottom was stronger than what we would have anticipated, now that’s probably a lot of pent-up demand that was out there. The second thing that certainly has happened, I think the nervousness that came in the general economy last year in April and May took about six months before we began to see it. The third factor has clearly been that there has been a difference in the magnitude of what’s going on particularly in the federal government, that’s in both healthcare and non-healthcare. I think some of that, by the way, is probably the government rightsizing itself, although that’s probably an optimistic view. I think some of it is also we are nearing the end of some major changes the government was making around BRAC relocation and some of those things, as well as some of the big buildup that happened in D.C. So, probably, it’s partly cyclical as much as it’s a change in their long-term tone. If you look underneath our numbers and you get some of that noise level out, the underlying strength of what’s going on in the core of the industry looks better, when you get down to what’s happening on the commercial side. Now, I’d say, better. It’s still not at the same growth we saw a year ago even in some of those areas, but it’s clear that some of the bounce back was fueled by the government. So, if you pull government out on both sides of it, it’s better in terms of its overall strength, it’s not as good as it was a year ago, although I think again that’s partially related to what happened in the economy probably 12, 13 months ago. As the economy continues to build, I think we’ll continue to see strength in the industry. I think most folks believe that will come on sort of the back half of the calender year, we should be probably part way through our next fiscal year. International continues to be very strong, particularly in emerging markets. Despite all of what you hear about China and other parts of Asia, we continue to see really good activity there. Europe has been good, although I would say, for us, we’re a small player, so it’s not as much about market share in the general market as how free to foot we are. We did start to feel a bit of the impact of the European slowdown, if you will, that you’re hearing about, although it wasn’t a huge significant factor in the number. So, overall, we remain very optimistic about what we’re seeing on the consumer side. That looks strong. We still feel really good about what we’re seeing in the BRIC or the emerging market. That’s really pulling a lot of our international business. The core on the commercial side looks good and we think building. If there’s an area that I have left, we have less visibility right now to understand the tenor of it, is probably healthcare. The faunal side of healthcare was quite good, although there seems to be a lot of stuff that was put on hold, and a fair amount of people ordering their investments around IT and other things before facilities. Having said that, there is quite a strong belief, if you look at the overall trends in healthcare, that there’s still a fair amount of construction in front of us, and we’re very driven on the construction side. That gives you kind of the broad color.
Budd Bugatch – Raymond James: I am a little surprised to hear China is strong. We heard some pockets of weakness there. So, you’re not seeing that as of yet, and of course, you’re adding POSH adjust at the same time.
Brian C. Walker – President and CEO: And POSH has had – it’s not – I mean like I think you hear from everybody, you’re right, China is probably not as strong as it was a year or two ago in terms of growth rates, but still comparatively, strong compared to what we’d see globally.
Budd Bugatch – Raymond James: Okay and did I hear you say POSH in the guidance is $10 million or $5 million a month? Is that the way to read that?
Gregory J. Bylsma – EVP and CFO: It’s $10 million for the last few months.
Budd Bugatch – Raymond James: So about a $60 million annual run rate for POSH?
Gregory J. Bylsma – EVP and CFO: Yes.
Budd Bugatch – Raymond James: Okay, all right, and one last question for me is on the operating expense line, I think you have about $2.1 million of reserve increase in that, so does that mean the run rate for expenses is it more like $105 million or $106 million on the OpEx line other than the stuff that we’re going to see with the pension accounting and what you’re going to have to book for that?
Gregory J. Bylsma – EVP and CFO: Well you’ve got to add POSH into there, so what we gave in our guidance represents the $112 million to $113 million for the fourth quarter.
Budd Bugatch – Raymond James: Okay, and that includes POSH at about $7 million a month or something like that?
Gregory J. Bylsma – EVP and CFO: I mean the fourth quarter represents, as you know, the Q4 number usually jumps up a little bit as we get ready for NeoCon. So that’s probably a little higher. The $112 million includes POSH, but it’s probably a little higher than what you would have in the run rate on a four quarter basis.
Budd Bugatch – Raymond James: And POSH will be accretive first year, how will that be?
Gregory J. Bylsma – EVP and CFO: We think that number in the first year, because of the arrangement, the improvement – there’s a law in discussion about how the manufacturing takes place, but the net of it is over a three-year period margins will slowly increase. We think accretive in the first year is $0.05 to $0.06.
Leah Villalobos – Longbow Research Independence: I was wondering if you could talk a little bit more. It sounds like you’re optimistic for the back-half of the calendar year and it sounds like the leading indicators are headed in the right direction, but customer visits, which seems like a pretty important leading indicators, were flat during the quarter. Was that flat kind of consistent throughout the quarter? Did you see some improvement? Could you kind of reconcile those two?
Brian C. Walker – President and CEO: I don’t know that you can read anything into interim how the quarter moved around with visits, because that all depends on projects and that kind of stuff. So, I think we’re trying to – if you go there you’re trying to take a fairly macro thing and try to analyze it to micro, you won’t get much out of that to be frank. Overall, I think if you look at the general industry in the last four or five months, it’s been fairly flat, and I think customer visits have reflected that. On the other hand, what you hear from the team out there and you can watch in the macro data that hiring continues to increase. People are beginning to talk much more about redoing even their corporate headquarters. I mean there is a fair amount of activity on that side. So, we just think that as the economy continues to improve and companies have cash and employment continues to gain traction, we’ll see a stronger industry and let the underlying data and drivers of the industry look like go ahead in the right direction at that point.
Leah Villalobos – Longbow Research Independence: Then just in terms of your exposure to federal government business kind of this quarter, maybe back half of the calendar year versus first half of the calendar year, do you have less exposure of is it pretty consistent throughout the year?
Brian C. Walker – President and CEO: Well first of all federal government is a little bit lumpy. You’ll tend to see a fairly heavy order pattern for federal government when you get to more the fall timeframe where typically we would have seen a lot of shipments hangover from the fall and be in the third quarter which we didn’t have much of this year given the lighter order entry in last – in the second quarter. So, there it does move around a little bit by quarter-to-quarter.
Leah Villalobos – Longbow Research Independence: But it sounds like for the May quota, there would be less exposure, is that fair?
Brian C. Walker – President and CEO: When you say less exposure, less exposure in terms of total dollars versus like the second quarter or are you talking about year-over-year change?
Leah Villalobos – Longbow Research Independence: No, only about the mix I guess, how much of it is kind of the second quarter versus your overall exposure for the year – not the second quarter, the fourth quarter?
Jeffrey M. Stutz – Treasurer and VP, IR: Leah, this is Jeff. If you go back or take it back a year ago, we were 14% in fiscal 2011, federal government. We’re certainly going to be lower than that this year, and I would say, yes, given what we saw last quarter, what we saw in Q3, that’s probably fair, that it’s going to be a bit lighter than what it had been in the first part of the fiscal year in terms of percentage mix.