Herman Miller, Inc. Fourth Quarter Fiscal 2016 Investor Conference Call June 23, 2016

Transcription

1 Herman Miller, Inc. Fourth Quarter Fiscal 2016 Investor Conference Call June 23, 2016 The following document is a replication of the notes used in Herman Miller, Inc. s Fourth Quarter Fiscal 2016 conference call presentation. Brian Walker, President and CEO; Greg Bylsma, Executive Vice President and Chief Operating Officer of Herman Miller North America, Jeff Stutz, Executive Vice President and CFO; and Kevin Veltman, Vice President Investor Relations and Treasurer, hosted the call. These notes represent an abridged version of the conference call and do not include the Q & A portion. Those wishing to hear the associated Q & A segment can do so by listening to the archived webcast version of the call on the investor relations page at 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 forms 10-K and 10-Q and other reports filed with the Securities and Exchange Commission. Also, the financial amounts and references to internal measures mentioned today are unaudited. OPENING BRIAN WALKER, PRESIDENT AND CEO Good morning everyone, and thank you for joining us. I will begin the call today by sharing my thoughts on our performance, highlight areas of accomplishment and summarize some of the areas where we still have to work to do. Last, I will provide some color on industry dynamics as we enter fiscal Then I ll turn it over to Jeff and Kevin to cover fourth quarter financials in more detail. We also have Greg Bylsma, Chief Operating Officer of our North American contract business, joining us for the Q&A portion of the call to offer his perspective on current conditions and opportunities we see for further growth in that segment. As we announced yesterday, our results this quarter cap a fiscal year in which we delivered all-time record net sales of $2.26 billion, representing an increase of approximately 6% despite currency pressures, along with a 19% full year increase in adjusted earnings per share. We had a high quality of earnings and generated very strong operating cash flow. We finished the year on a strong note, with revenue this quarter of $583 million, coming in above the high end of our expectations for the quarter. Adjusted earnings of $0.56 also exceeded our guidance and reflected a 19% improvement over the same quarter last year

2 In all, we achieved a Return on Invested Capital of 22% on the full year, and generated more than $210 million in cash flow from operations allowing us to fund strategic investments and reduce outstanding debt levels. Yesterday we announced a 15% increase in our quarterly dividend payout a decision that reflects the confidence of our Board and management team in the power of our strategy and strength of our financial position. Importantly, it reflects confidence in our ability to reach even greater heights in the year ahead. Our performance this year was led by a significant turn-around in our North American segment. Growth in the segment was broad based with notable strength in commercial offices and healthcare. In particular, we had one of our best years in Healthcare in recent memory. Our Specialty businesses (Geiger, the Herman Miller Collection and Maharam) continued to grow nicely and posted improved profitability. In total, our North American commercial interiors businesses have outpaced the overall industry. Our Europe, Latin America and Asia team did a great job of over-coming significant economic and currency headwinds to post increased profitability. The relative strength of this business was in Asia where our POSH acquisition has rebounded to be a solid contributor. Our Consumer segment fell short of our goals for the year in terms of both sales and profitability. To be frank, we took a number of actions that we believe are critical to our long-term health in this segment that didn t play out as expected in the short-run. And, we are behind on our conversion to the new studio model. We finished the year with fewer studios and about the same amount of square footage compared to where we were at this time last year. The team has worked very hard to get these issues back on track and we expect improved performance in We believe Herman Miller has a strong foundation to create shareholder value that is built on our Higher Ambition Culture, our ecosystem of leading brands, our capacity for innovation, a growth strategy that is catalyzed by an industry leading multi-channel distribution system and a proven track record of operational excellence and financial management and stewardship. Over the past five years we have consistently and diligently pursued a strategy to increase the size of our addressable market and position us for faster growth and higher margins. To achieve these objectives we have used a combination of internal development and targeted acquisitions. This past year we had a number of accomplishments that furthered the implementation of long term strategy, solidified our foundation for growth and improved our operating results. We created and delivered a series of bootcamps designed to equip our dealers and our field sales folks with the product knowledge and tools they need to best position our products to win. While we had a number of bootcamp events this past year, this is a long term capability that is needed to keep our teams up to speed with our fast evolving offer and knowledge

3 We refined our sales deployment model to ensure we are best aligned to serve dealers and increase our share of their business and increase our share of government, healthcare and education customers spend on furnishings. In response we developed and launched the new Channel Sales Manager role and team. These folks have the responsibility of representing all of our brands to our dealers. We are pleased by the early progress of this team and think it holds great promise. We also reorganized our sales efforts around Healthcare, Government and Education. These changes lead to better coverage of opportunities and better alignment of skill sets. This enabled us to put additional resources on the largest Healthcare and Government organizations. This has and will pay great dividends as we offer all of Herman Miller s expanded capabilities to these large and complex organizations. We implemented a new product commercialization process and structure to ensure we will continue to be the innovation leader in our space. While we still have much work to do, we have clear signs that these changes are making a difference. This year at NeoCon we launched in excess of 20 new products. This included new products from our R&D studios in Herman Miller, Geiger, Collection, Nemschoff, Herman Miller U.K. and Maharam. The focus of work over the past year has been to expand the breadth of our offer into new categories where we are currently under penetrated. The breadth and quality of the work was impressive and we were recognized with a number of awards. And, we have a very robust pipeline of new ideas that will continue to propel us forward over the coming years. In addition to internal development, we recently announced a strategic partnership with U.K. based naughtone. This partnership will augment our internal development of furnishings for those work-points on the floor plate that are beyond our historical focus on individual work stations. And, they will add to our operational capabilities needed to serve the EMEA region. We made a number of steps which will enhance our ability us to deliver on the promise of the Living Office. We began to rollout a number of case studies which provide evidence of how the application of the Living Office can improve our customers businesses and the lives of their people. At NeoCon we began the introduction of a number of new products and partnerships that will enable us to deliver our three part strategy for the connected and quantified office: Smart Furnishings, Smart Settings and Smart Places. These capabilities combined with our growing breadth of solutions beyond the workstation, significantly enhanced our ability to deliver on the promise of the Living Office introduced four years ago. Enriching the way customers experience Herman Miller and our ecosystem of brands is long-term objective. Starting in the fourth quarter of last year we re-set all of our global showrooms to better serve our customers and dealers. This past year we opened new showrooms in Washington D.C. and New York. The New York showroom is our first flagship location that unites our Herman Miller, Geiger, Collection and Maharam brands. This location will serve as the home for our talented - 3 -

4 folks in this region and create a unique experience for both our contract and consumer customers. We fell short of our goal to open six new DWR studios. However, we did open new or expanded DWR studios in Arizona and California. And, we enter 2017 with a strong pipeline of nine new studios that are under contract and in our plans. Last, we invested in new capabilities to enhance our ability to serve our dealers, corporate customers and consumers. Our Made to Measure program significantly improved our ability to respond to our customer s needs for customized solutions. We implemented new information technology systems at DWR, Nemschoff and a number of our international locations. These systems will enhance the operation of the business and make us easier to do business with. At the close of the fourth quarter, we launched a new and improved e-commerce store for DWR. In this coming year we will up-grade the Herman Miller Ecommerce store with the same technology. We completed the opening of our new manufacturing and logistics facilities in the United Kingdom and India. In North America, we invested in new manufacturing process equipment that will improve our quality and cost. To be frank, we experienced some growing pains in our Consumer segment this year and there is more work to do. That said, we continue to believe the strategic drivers that lead us to invest in this segment are intact. As a reminder those remain: The convergence of work and home environments. The power of having a multi-channel capability for increasing the size of our addressable market. Last, the permission the Herman Miller brand has to play in this segment of the furnishings space. The recent NeoCon event, further confirmed the convergence we predicted with the launch of the living office is happening. More specifically, we remain confident that Design Within Reach was a great fit with Herman Miller as it contained the capabilities needed for us to make this strategic move, the brand was congruent with Herman Miller and they have a talented leadership team. While we are disappointed with the results for the quarter and year, I m pleased to report that we ve made significant progress on a number of fronts this year and we re well positioned for future growth. As part of our real estate transformation, we closed a number of smaller legacy retail studios during the year and developed an exciting pipeline of new and expanded studios for next year. We re beginning to see the impact of our investments in brand awareness and channel initiatives, and we expect to realize further benefits over the next couple of quarters. These efforts included a mobile-optimized web platform and rolling out a new sourcebook to highlight the breadth of our offer for our trade partners. We also implemented a new ERP system during the second quarter of the year that brings significantly improved capabilities. In the fourth quarter, we reached an agreement with Amazon.com that expands our wholesale market coverage. Finally, our growing Contract business continues to be a bright spot as we - 4 -

5 expand volumes through the Herman Miller dealer network a great example of the potential that exists with our multi-channel strategy. The negative operating results this quarter were driven by increased investment in marketing, an unfavorable mix of trade and contract business, year-end accounting adjustments and pre-opening studio costs. Looking to next year, we re confident we have the right foundation in place for executing on our consumer growth strategy. Our plans for fiscal 2017 include ramping up our DWR studio footprint by approximately 100,000 square feet by the end of next year and launching several exclusive product designs. We ve recently implemented changes to our catalog program, which we believe will significantly improve the efficiency of new customer prospecting. And later this fall, we have exciting plans for the launch of a new retail store to anchor our New York flagship showroom the first Herman Miller-branded retail store in North America. Let me close with a few comments about the macro environment. While pressures in the energy sector and political uncertainty persist as headwinds, the core industry metrics for the North America contract business remain generally supportive. In particular, service sector employment, non-residential construction activity, and the architectural billings index have all been positive and inform a BIFMA forecast for low to mid-single digit annual growth through There is a good deal of construction activity in the healthcare space which augurs well for this sector. On the consumer front in North America, a recent dip in consumer confidence has been offset by strong housing activity, low interest rates, and rising household incomes. As you might expect, regions impacted by the energy sector have been challenging. Outside of North America, the economic picture remains mixed. While the impact of strong dollar headwinds has lessened, uncertainty in Europe and various oilproducing regions persists. That said, our confidence in the long-term growth potential of our business in key global regions has not wavered. On the commodity front, we re starting to see some increases in input costs such as steel, so, in addition to our ongoing lean manufacturing emphasis on identifying operational improvements, we re moving ahead with plans for a price increase later in fiscal On balance, while there are challenges and risks to the global economy, we believe the current cycle of growth should continue through fiscal And, we believe the accomplishments from 2016 and the plans we have for 2017 should enable us to stay on pace with our long term objectives. With that, I ll turn over the call to Jeff who will provide more detail on the financials

6 Q4 FINANCIAL REVIEW JEFF STUTZ, CFO Thanks, Brian and good morning everyone. Consolidated net sales in the fourth quarter of $583 million were 6% higher than the same quarter last year. Orders in the period of $606 million were 9% above the prior year level. These amounts reflect a strong finish to the year as they represent our highest quarterly sales and orders levels in the past fifteen years. As I mentioned last quarter as well, with respect to our year-over-year order comparisons, one important point to consider is the relative impact of general price increases that went into effect during the third quarter of last fiscal year. Our best estimate is that this had the effect of shifting approximately $20 million of orders into the third quarter that would have otherwise been entered in the fourth quarter of last year. By contrast, we made no significant price changes in the third quarter of this year and, accordingly, saw no comparable shift in the timing of order entry. Net this had the impact of limiting our reported order levels in the fourth quarter of last year. To be clear, given the level of estimation required to quantify this, we have not adjusted for it in our calculation of organic order growth in the period. Still, we believe it s a factor worth considering as you evaluate our results. Sequentially, net sales in the fourth quarter increased approximately 9% from the third quarter level, while orders increased 19%. These sequential improvements are slightly above the average seasonal trends we ve seen in the business over the five fiscal years. Within our North American segment, sales were $333 million in the fourth quarter, representing an increase of 8% from the same quarter last year. New orders in this segment totaled $359 million in the fourth quarter, reflecting an increase of nearly 12% from last year. Project sizes above $1 million were particularly robust during the quarter. Order growth by industry sector was fairly broad-based, led by healthcare, business services and state and local government. The energy sector continues to be the notable exception as that industry grapples with a difficult economic climate. Our ELA segment reported sales of $111 million in the fourth quarter, reflecting an increase of 7% compared to last year. New orders totaled $102 million, an amount 9% higher than the same quarter last year. This year-over-year order growth was led by strong demand in continental Europe, South Africa and China. These areas of relative strength were partially offset by softer demand in the U.K. and Latin America both of which are regions facing acute political and economic uncertainty. Sales in the fourth quarter within our Specialty segment were $62 million, an increase of almost 4% from the same quarter last year. New orders in the quarter - 6 -

7 of $62 million were 7% higher than the year ago period. Consistent with what we saw throughout the fiscal year, our growth within this segment was led by strong momentum at both Geiger and the Herman Miller Collection. The Consumer business reported sales in the quarter of $78 million, a decrease of 2% compared to last year. On a comparable brand basis, revenues for the quarter were up approximately 1%. I would note that we have revised the comparable sales measure that is provided in our supplemental materials this quarter, moving from a comparable studios measure to comparable brand sales. We believe this better reflects sales results across the multiple channels that DWR serves. New orders for the quarter of $84 million were slightly ahead of the same quarter last year. Relative to the fourth quarter, operating results were unfavorably impacted by a number of year-end closing adjustments, primarily around inventory and accounts receivable. In addition, we ramped up our marketing spend in the quarter, particularly in the areas of catalog and digital, and we were encouraged to see order demand accelerate in the month of May. Our consolidated gross margin in the fourth quarter was 38.7%, a 60 basis point improvement over gross margin of 38.1% in the fourth quarter last year. The year-over-year improvement was fueled by favorable commodity costs, production leverage and ongoing operational improvements. We had a relatively high mix of large projects this quarter, both in the U.S. and abroad, and consequently our gross margins reflected the impact of deeper average discounting versus where we ran last quarter. Additionally, with the recent uptick of steel and oil prices, we began to feel moderation in the comparative year-onyear favorability of commodity costs. These factors aside, the relative strength of our gross margin performance remained a highlight in our consolidated results for the quarter and full fiscal year. I ll now cover operating expenses and earnings in the period. In total, operating expenses in the fourth quarter were $169 million compared to $162 million in the same quarter a year ago. Our current quarter expenses reflect the impact of pre-tax gains totaling approximately $6 million associated with the sale of a former manufacturing facility in the United Kingdom as well as the divestiture of Living Edge Furniture - our dealership in Australia. Excluding these gains, operating expenses in the fourth quarter were approximately $13 million higher than the same quarter last fiscal year. The majority of this increase relates to spending on new product launch and marketing initiatives, higher incentive accruals, product warranty expenses, and general variability from higher net sales. Operating income this quarter was $57 million, or 9.7% of sales, compared to $37 million, or 6.7% of sales, in the prior year period. Excluding the impact of the gains I just described, adjusted operating income was $51 million or 8.7% of sales. By comparison, we reported adjusted operating income of $48 million or 8.7% of sales in the fourth quarter of last year

8 The GAAP-basis effective tax rate in the fourth quarter was 24.9%. The rate for the quarter was lower than previously forecast due principally to the impact of a favorable transfer pricing adjustment totaling $2.0 million recorded in the quarter. As this transfer pricing benefit reflected the full year benefit for fiscal 2016, approximately $1.5 million, or $0.02 per share, of the benefit was not attributable to the quarter. This compares to an effective tax rate of 29.5% reported in the same quarter last year. Excluding the impact of this transfer pricing adjustment, the effective tax rate in the fourth quarter was within the range we provided at the beginning of the period. Finally, net earnings in the fourth quarter totaled $41 million, or $0.67 per share on a diluted basis. Excluding the partial year of tax transfer pricing benefit and gains associated with the dealership and U.K. property sales, adjusted diluted earnings per share in the quarter totaled $0.56. This compares to adjusted earnings of $0.47 per share in the fourth quarter of last year and reflects a 19% year-over-year increase in earnings per share. With that, I ll now turn the call over to Kevin to give us an update on our cash flow and balance sheet. KEVIN VELTMAN, VICE PRESIDENT INVESTOR RELATIONS & TREASURER Thank you, Jeff. We ended the quarter with total cash and cash equivalents of $85 million, which reflected an increase of $30 million from last quarter. Cash flows from operations in the period were $85 million, representing an increase of 46% from the fourth quarter of last year. The primary contributors to the increase in operating cash flows for the quarter were higher net income, as well as working capital inflows from higher accounts payable and lower inventory levels, offset by higher accounts receivable. For the full fiscal year, cash flows from operations were $210 million, reflecting an increase of 25% over the prior year. Capital expenditures were $30 million in the quarter, bringing the year to date total to $85 million. Looking ahead to next fiscal year, we anticipate capital expenditures of $80 million to $90 million for the full fiscal year. Cash dividends paid in the quarter were $9 million and $35 million for the full year. The dividend increase we announced yesterday increases our expected annual payout level to approximately $41 million. The new quarterly payout level also brings the dividend in line with our yield target and is in keeping with our commitment to balance our capital structure priorities, including funding internal growth investments, reducing outstanding debt levels, and enhancing cash returns to our shareholders. We also continued a share repurchase program at a level aimed at offsetting dilution from share-based compensation programs. In total, we made repurchases of $6 million during the quarter and $14 million for the full year

9 We remain in compliance with all debt covenants and as of quarter-end our gross-debt to EBITDA ratio was approximately 0.8 to 1. The available capacity on our bank credit facility stands at $219 million. Given our current cash balance, ongoing cash flows from operations, and our total borrowing capacity, 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 first quarter of fiscal OUTLOOK JEFF STUTZ Thanks Kevin. I ll begin with two important factors that you should consider in developing your models for our first quarter. First, you should bear in mind that our 2017 fiscal year will include 53 weeks of operations. The addition of this extra week is required approximately every five years to re-align our fiscal periods with the calendar months. As a result, our first quarter will include 14 weeks of operations though the relative timing of scheduled summer holidays will reduce the impact of this extra week to four incremental shipping days relative to the first quarter of last year. The second factor relates to the relative impact of the Australian dealership divestiture, which occurred at the end of the fourth quarter as the culmination of a long-term plan to transition ownership to the local management team. This will of course impact our year-over-year revenue and order comparisons in the first quarter. Net of intercompany eliminations, that dealer contributed approximately $9 million of revenue in Q1 of last fiscal year. Considering these factors, we anticipate sales in the first quarter to range between $600 million and $620 million. On an organic basis, adjusted for the extra week and dealership divestiture, this forecast implies revenue growth of approximately 3% at the mid-point of the range. Consolidated gross margin in the first quarter is expected to range between 38.0% and 39.0%. This forecast incorporates the expected impact from the recent uptick in market prices for key commodity inputs. The extra week of operations in Q1 will add incremental operating expenses of $9 to $10 million, partially offset by the elimination of expenses from the dealer sale. In total, operating expenses in the first quarter are expected to range between $174 million and $177 million

10 We anticipate earnings per share to be between $0.60 and $0.64 for the period. This also assumes an effective tax rate of 32% to 33%. With that, I ll now turn the call back over to the operator for your questions. [Q&A] CLOSING BRIAN WALKER Thanks for joining us on the call today. We appreciate your continued interest in Herman Miller and look forward to updating you next quarter. Have a great day