Herman Miller, Inc. Third Quarter Fiscal 2015 Investor Conference Call March 19, 2015

Transcription

1 Herman Miller, Inc. Third Quarter Fiscal 2015 Investor Conference Call March 19, 2015 The following document is a replication of the notes used in Herman Miller, Inc. s Third Quarter Fiscal 2015 conference call presentation. Brian Walker, President and CEO; Jeff Stutz, CFO; and Kevin Veltman, Vice President of Investor Relations & 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 thank you for joining us on today s call. I ll begin with a brief update on our recent performance and key strategic initiatives, then hand the call over to Jeff and Kevin to review the financials in greater detail. As you know, we announced preliminary third quarter sales and orders on March 2 just ahead of our presentation at the Raymond James Investor Conference that same week. Our final results for the quarter landed within the ranges we provided at that time, with consolidated sales coming in at $516 million and new orders totaling $501 million, representing year-on-year growth of 13% and 8%, respectively. As we noted at the time of our pre-announcement, during the third quarter we continued to see momentum in our Specialty and Consumer business segments, both of which reported year-on-year growth in sales, orders, and profitability. The same can be said for our ELA segment, which despite a challenging currency environment posted solid organic sales and order growth and improved earnings performance. At the same time, as we highlighted last quarter, the performance of our North American Contract business has not met our expectations, particularly in the - 1 -

2 area of order growth, which began to lag the broader industry trends during our second quarter. On our call in December, we outlined several contributing factors, along with the actions we were taking to address the issues. During the third quarter we rallied around implementing these action plans. Indeed many of them are completed and we continue to actively make tactical moves to improve both our short and long term competitive position in this segment. While we are pleased with the speed with which the organization is responding to these challenges, these actions did not impact orders and revenue in the third quarter. To be frank, given the project cycles of this segment, it will take some time before these actions work there way through wins, orders and ultimately revenue. With that said, we are confident these actions will improve our competitive position and, we will be relentless in our drive to compete and win. I would further note that our industry outlook for North America continues to show positive signs. The most recent BIFMA forecast calls for mid-single digit growth in calendar 2015 and Underlying leading indicators including service sector employment, non-residential construction forecasts and ABI trends should also support our efforts to accelerate growth. So let me recap how we plan to do it. First, I ll discuss actions within our sales organization and then what we are doing on the product side. Within sales, we increased selling capacity during the third quarter by filling open sales positions and we are now running at normal staffing levels. We are also putting greater focus on small and mid-size projects to ensure we are competing more effectively for this business. Finally, we are executing detailed market-bymarket plans to ensure showrooms and sales teams are well-positioned to effectively communicate our value proposition. Each of these initiatives is up and running and gaining traction. From a product perspective, we have completed the development and launch of key new product introductions, including Canvas Dock and important extensions to the Public Office Landscape and Mirra 2 product lines, all of which are now available for order. We are also accelerating the development of products which will fill gaps in our offer over the next six to twelve months. We have also re-set many of our North American showrooms with the remainder to be completed by the end of the fourth quarter. The objective was to ensure we had the right assortment of products on the floor, including our newest products such as Canvass Dock. We have also moved quickly to get these products into the showrooms of our dealers and accelerated the training of their people. In addition to these actions, we took important steps within our North American leadership to ensure we have the right team in place to help us execute our strategic plan. Our goal is simple get closer to the customer and dealer, and - 2 -

3 then deliver industry-best speed and solutions. And we re confident we have the right team to do it. To sum it up, as we look at our North America business, we have our arms around the issues, we are attacking them with a sense of urgency and resolve, and we are confident that we have the right strategy, the right tools, and the right leadership in place to return this business to higher growth. Let me now turn to the other parts of our business that have continued to perform well. The Specialty and Consumer segments once again delivered solid orders, sales, and margin contribution. That s great evidence of continued progress in our SHIFT strategy to diversify our customer base and develop new avenues for long-term growth as we focus on building a lifestyle brand. Within the Consumer segment, the integration of DWR is well under way and proving very complementary to the strategy. The team, led by John Edelman and John McPhee, is deeply engaged and moving ahead in high gear on our priorities and plans. We are making good progress toward our exclusive product goals, introducing more DWR exclusives and growing our Herman Miller Consumer product offer, while also expanding our e-commerce business. We are also continuing to see growth from other key non-exclusive brands that DWR carries. Likewise the new large-format studios continue to perform well and are proving to be a more efficient model for the business. We will continue to convert three to five studios per year to the larger formats that allow us to display our products much more effectively for our customers. In short, the Consumer business is becoming a powerful part of our economic engine, and we expect the positive momentum the team is building to continue. Our Specialty business also performed well this quarter, with double-digit sales and order growth at both Geiger and our Herman Miller Collection business. The Maharam team continues to deliver premium margins and we remain very positive on their growth potential, with active plans underway in new categories and geographies. While our reported growth rates in the third quarter reflect the negative impact of the strengthening U.S. dollar, our ELA segment delivered solid organic results, posting year-over-year growth of 6% in sales and 5% in orders. This growth was led by increased demand in the Asia-Pacific region particularly Australia and India and continued project activity in the Middle East. As we look at the Herman Miller value proposition overall, we have a premier brand and a talented team to take it further. We are focused on executing a strategy that fits well with our strengths and capabilities. Through our swift and decisive actions and an unmatched dealer network, we are confident we will regain momentum in our Contract business in North America

4 With that, I will turn the call over to Jeff to further discuss the financials. [Q3 FINANCIAL REVIEW JEFF STUTZ, CFO] Thanks, Brian... Consolidated sales in the third quarter of $516 million were 13% higher than the same quarter last year. Orders in the period of $501 million were 8% above the prior year level. On an organic basis, excluding the impact of DWR, dealer divestitures and foreign currency translation, net sales in the period increased 4% from the prior year. Within our North American segment, sales were $296 million in the third quarter. This represents an increase of 1% from Q3 of last year. Adjusting for the impact of dealer divestitures and foreign currency translation, segment sales were up nearly 3% on a year-over-year basis. New orders in this segment totaled $282 million in the third quarter, reflecting a 3% decrease from last year on a GAAP-basis, and an organic decline of 1%. Our ELA segment reported sales and orders in the third quarter totaling $97 million and $100 million, respectively both of which reflect a decrease of 1% compared to last year. Adjusted for the negative impact of changes in foreign currency translation, segment sales increased approximately 6%, and orders were up 5% relative to Q3 of last year. As Brian highlighted, the organic sales and order growth was by driven by increased demand in the Asia-Pacific region particularly Australia and India and continued strength in the Middle East. Sales in the third quarter within our Specialty segment totaled $51 million. This represents a 6% increase over the same quarter last year. New orders in the quarter of $53 million increased almost 8% from the year ago period. Our Consumer segment reported sales of $73 million in the third quarter - an increase of $56 million from the same quarter last year. Of course, the addition of DWR drove the majority of this year-on-year sales growth, but we also enjoyed strong organic growth, posting an increase of 22% over Q3 of last year. New orders in this segment totaled $65 million an increase of $43 million over last year. We estimate that the translation impact from changes in currency exchange rates relative to year-ago levels reduced our consolidated net sales and orders in the quarter by approximately $8 million. I ll now review expenses and earnings for the quarter. Our consolidated gross margin in the third quarter totaled 36.9% compared to 35.7% in the same quarter of last fiscal year. This 120 basis point improvement - 4 -

5 resulted primarily from favorable product and channel mix, including the addition of DWR, operational improvements within our Specialty and ELA business segments, and net pricing realization. These factors combined to more than offset the negative currency impact of the stronger U.S. Dollar. Operating expenses in the third quarter of $151 million were up $24 million from the same quarter last year. This relative increase in expenses was driven principally by the addition of DWR. Additionally, during the third quarter we announced restructuring actions involving targeted workforce reductions within our North America business. These actions resulted in the recognition of severance and outplacement expenses totaling $1.9 million before tax. On a GAAP basis, including restructuring expenses, we reported operating earnings of $37 million in the third quarter. Excluding these charges, adjusted operating earnings this quarter were $39 million, or 7.6% of sales. In the third quarter of last fiscal year, adjusted operating earnings were $35 million or 7.7% of sales. Our effective tax rate in the third quarter was 33.6% compared to 33.3% in the same quarter of last year. Finally, net earnings in the third quarter were $21 million, or $0.35 per share on a diluted basis. Excluding the impact of restructuring expenses recognized in the period, adjusted diluted earnings per share this quarter totaled $0.37. This compares to adjusted earnings of $0.34 per share in the third quarter of last year. With that, I ll turn the call over to Kevin to give us an update on our cash flow and balance sheet. [KEVIN VELTMAN, VICE PRESIDENT OF INVESTOR RELATIONS & TREASURER] Thank you, Jeff. We ended the quarter with total cash and cash equivalents of $62 million an amount down approximately $3 million from where we ended last quarter. Cash flows from operations in the third quarter totaled $29 million, which reflects an increase of $6 million over the third quarter of last year. Changes in working capital resulted in a net cash use of $12 million in the period. This was driven primarily by a reduction in accounts payable balances and increased prepaid expenses associated with income tax payments. These changes were partially offset in the quarter by a net reduction in trade receivables. Capital expenditures in the quarter were $17 million; and we continue to anticipate full-year capital spending to be between $65 million and $70 million

6 Cash dividends paid in the quarter were $8 million compared to $7 million in Q3 of last fiscal year. We remain in compliance with all debt covenants and as of quarter-end our gross-debt to EBITDA ratio was approximately 1.4 to 1. The available capacity on our bank credit facility stands at $116 million at the end of this quarter. We are confident we can meet the financing needs of the business moving forward given our current cash position, expected cash flows from ongoing operations, and available borrowing capacity. With that, Jeff will now cover our sales and earnings guidance for the fourth quarter of fiscal [OUTLOOK JEFF STUTZ] Thanks, Kevin We expect sales to range between $530 million and $560 million in the fourth quarter. This guidance implies total revenue growth between 10% and 14% over Q4 of last fiscal year. We expect our consolidated gross margin in the fourth quarter to remain fairly stable with the Q3 level, as increased factory production and lower commodity costs are offset by continued currency pressure and incremental discounting. In total, we expect gross margin to range between 36.5% and 37.5% for the fourth quarter. We anticipate a seasonal ramp-up in operating expenses this quarter driven by higher sales volume, increased spending on program marketing in support of new product launches and preparations for the NeoCon tradeshow in June. In addition, we expect our fourth quarter expenses will reflect incremental investments in selling capacity and showroom refreshes relative to our third quarter spending level. In total, Q4 operating expenses are expected to range between $157 million and $161 million. Earnings per share in the quarter are expected to be between $0.39 and $0.43. This guidance assumes an effective tax rate of approximately 34%. I should also point out that this estimated tax rate does not reflect any potential benefits related to certain tax planning ideas we are contemplating for the fourth quarter. With that, I ll now turn the call back over to the operator so we can take your questions. [Q&A] - 6 -

7 [CLOSING BRIAN WALKER] Thanks again for sharing your time with us today. I hope you hear our determination, and a sense of urgency, to improve the competitive position of our North American business while continuing to build on the momentum in our Specialty, Consumer and ELA segments. Thank you for your continued interest and we will look forward to updating you in June. Have a great day