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Herman Miller, Inc. First Quarter Fiscal 2013 Investor Conference Call September 20, 2012 The following document is a replication of the notes used in Herman Miller, Inc.’s First Quarter Fiscal 2013 conference call presentation. Brian Walker, President and CEO; Greg Bylsma, CFO; and Jeff Stutz, Treasurer and Chief Accounting Officer, 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 www.hermanmiller.com. 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 welcome. In recent quarters we’ve demonstrated our ability to deliver solid business performance despite a continuing backdrop of uncertain economic conditions. Good demand in our core North American business, including areas of recent strategic investment, combined with growth in emerging global markets, have served to offset slower sales to the federal government and in healthcare, as well as the challenges in continental Europe. In many respects this morning’s update is an echo of recent quarters. While order levels from the U.S. federal government and healthcare customers were again soft this quarter, the remainder of our business in North America remained solid – highlighted by good demand from our core commercial and Specialty and Consumer customers. Outside the U.S., order activity was again mixed, with growth in Asia offset by year-over-year decreases in Europe. The macro-economic picture is today largely unchanged from when we last spoke in June. Corporate balance sheets remain healthy, supported by relatively high levels of available cash and continued profitability. Trends in service sector employment levels have continued at a modestly positive pace. New office construction activity – while reasonably stable in recent months - has yet to show significant signs of improvement. This is reflected in the most recent ABI data, -1- which showed improvement in July yet has remained below the 50-mark for the past four months. With all that as backdrop, the BIFMA forecast for market consumption in 2012 and 2013 was recently revised downward, to increases of 2.9% and 3.6%, respectively. If you remember back to one of the questions I took on our last call, this 3% range is actually where we were at in June with our internal estimates of industry growth. My point is this—we’ve built our plan and our performance targets with these conditions recognized and understood. We remain confident we can execute in this environment and stay on our strategic track, with optimism in reaching our 2015 goals in the longer term. Let’s move on then to more of the specifics surrounding our business this past quarter. As I said earlier, we are continuing to see weakness in demand from the U.S. government and in our healthcare business. I’ve also noted before that for Herman Miller the two are inter-related, as a sizeable part of our healthcare sales have been within government healthcare facilities. We believe the softness we are seeing in these sectors is a macro demand issue, but we continue to adjust our approach and cost structure in these sectors to ensure we will win our fair share and do it profitably. Given the current political and economic environment, we don’t anticipate federal government demand to change in the short-run. But we have historically held a large share of this business and we intend to continue to earn the sales that are available to us. Within Healthcare, the consolidation of Nemschoff’s manufacturing operations is now largely complete. These moves will enhance our manufacturing efficiencies and are expected to drive annual savings of between $2 million and $3 million. We have also recently brought on board Louise McDonald, our new executive lead for Herman Miller Healthcare. Louise brings with her significant international healthcare experience and is supported by a capable and focused team. Together they are working hard to build on our industry leading brands and product portfolio, as well as our sales and distribution networks. While we have hurdles near term with both uncertainty in public policy and an investment focus by healthcare providers that more recently moved away from facilities infrastructure, we see these issues settling and turning our way again in the mid- term. We are committed to Healthcare and believe the future will confirm we’re right to be there. The demographics in the developed world and rising demand for quality healthcare in emerging markets suggest secular industry growth in the years to come and we remain confident in the future of the Herman Miller Healthcare business. While we clearly have areas of challenge, I’m glad to report that we also saw strength in other important areas of our business this past quarter. Adjusted for the extra week of operations in Q1 last year, our Specialty and Consumer -2- segment reported a 36% increase in orders, led by solid performance at both Geiger and our Herman Miller Collection business. Looking into the fall and winter, we also are optimistic for our growth prospects in the consumer market as more Collection products come on-line and retailers ramp up their seasonal promotions. Our Thrive initiative is another success story. We continue to grow our portfolio of industry leading ergonomic furnishings, tools and accessories, supported by our own dedicated sales team. Working with our dealers they are growing market share with unique, high performance products and a targeted selling model. Building on that proven formula, this month we are very excited to have launched our new Small and Medium Business initiative, using a combination of an online storefront, a dedicated Herman Miller field sales team, and committed dealer partners. All three are linked to work together in providing instant access, consultative sales and quality delivery and service tailored to the small and mid- size customer. While we’ve enjoyed some success with these customers in the past, we believe this renewed focus and new resources will enhance our growth opportunity going forward. Beyond what we’re experiencing with the federal government, the underlying strength of our core North American office furniture business reflects our continued focus and investment, even as we drive our strategy for greater diversification. Those investments include exciting new seating and furniture systems programs that will launch next summer and fall which we believe will reinforce Herman Miller’s position as the industry’s innovation and knowledge leader in the future of the workplace. I’m very pleased to announce that early evidence of that came this past quarter with our success in winning one of the largest projects in Herman Miller's history – a multi-year contract for ExxonMobil's new campus now in development near Houston. While we work hard to earn every customer's business, this particular project is a real testament to the creative strength and dedication of our entire organization. Several dozen people from teams across the business worked together to listen to the unique needs of the client and answered with a creative, customized solution. We're excited to be working with ExxonMobil and I'm really proud of the way the Herman Miller community responded to this terrific opportunity. Internationally, as in the prior quarter and consistent with the global headlines, we continued to see weakness in Europe. This included a softening in the UK market driven, in part, by slow commercial activity during the Queen’s Jubilee and Summer Olympics. On the plus side, our business in Asia – particularly within China and India – continues to grow and is an area of focus for development. In China, our POSH integration continues. While this is always challenging work, we are pleased with our combined teams’ effort and the good -3- progress they are making. We have also acquired land that will enable us to move ahead with plans to expand our operating capacity in Ningbo and really leverage the strength of our combined brands and distribution in greater China and across Asia. To summarize, while there are clearly some near term challenges, we are confident that we have the strategic focus, strength of balance sheet, and people to deliver on our goals for diversified growth and operational performance by 2015. We are looking forward to sharing further progress in coming quarters. With that, I’ll turn the call over to Greg and Jeff for more details on the first quarter’s results. [Q1 FINANCIAL REVIEW – GREG BYLSMA, CFO] OK - Thanks, Brian... To begin, I’ll remind everyone that our first quarter was comprised of 13 weeks, while, the comparable period last year included an extra week of operations in order to realign our fiscal calendar cutoff. As I talk through the details I’ll quantify the impact of this additional week on our year-over-year comparisons. On a consolidated basis, net sales in the first quarter were $450 million. This represents a decline of 2% from the year ago period - and a sequential-quarter improvement of 7% from the fourth quarter of last fiscal year. Consolidated orders in the first quarter of $452 million were down 6% on a year-over-year basis, and improved 2% sequentially. Adjusting for last year’s extra week of operations, pro-forma sales were up 6% on a year-over-year basis, while orders grew 1%. Net sales and orders within our North American reportable segment reflected the contrasting demand Brian described among federal government, healthcare, and core office furniture customers. In total, segment sales in the period of $320 million were down 3% from Q1 of last year. Orders this quarter were $307 million – an amount down 11% from the same period in fiscal 2012. Adjusting for the impact of the extra week of operations, sales increased 4% while orders were down 4%. However, when you factor out the concentrated weakness we’ve seen in the federal government and healthcare sectors, the balance of this segment reported solid growth – with sales and orders increasing 16% and 5% over the prior year, respectively. Our non-North American reportable segment posted net sales of $95 million in the quarter. This represents an 11% increase from the year ago period. Orders in the quarter of $99 million were flat with the prior year. Adjusting for the impact of -4- the extra week of operations, segment sales increased 20% and orders were up 7% relative to the first quarter of fiscal 2012. Sequentially, non-North American segment sales decreased 3% while new orders were up 18% from the fourth quarter of fiscal 2012. Within our Specialty and Consumer reportable segment, net sales this quarter were $35 million. This represents a decrease of 19% from the same quarter last fiscal year. Orders in the period totaling $46 million were 26% higher than the first quarter of last year. Excluding the impact of the extra week, segment sales decreased 12% from the prior year while new orders were up an impressive 36%. This increase in order activity was driven by strong demand at our Geiger subsidiary and growth of our Herman Miller Collection business, where orders were up almost 70% from a year ago. Relative to the fourth quarter of fiscal 2012, sales decreased 7% and segment orders were up 17%. We estimate the translation impact from changes in currency exchange rates decreased our consolidated net sales and orders in the quarter by approximately $6 million relative to the first quarter of last year. This resulted from the general strengthening of the U.S. Dollar against other major currencies compared to a year ago. I’ll now review our gross margin performance in the period… As a starting point, I should remind everyone that late last fiscal year we outlined a transition strategy aimed at closing and ultimately terminating two defined benefit pension plans covering current and former US-based employees. During the quarter we recognized approximately $3 million in non-cash amortization expenses associated with these plans. Approximately one-half of these expenses are recorded within Cost of Sales, and therefore impacted our gross margin in the first quarter. The remaining charges are reflected in operating expenses. Our consolidated gross margin in the first quarter was 33.3%, representing a 40 basis-point decrease from Q1 of last year. This was below our expectations coming into the period due to a number of factors. The first was an adverse shift in sales mix in the quarter, which favored a higher proportion of systems furniture sales – along with lower sales through our retail channel – than we had anticipated. We were also negatively impacted by movements in average currency exchange rates in the quarter, particularly relating to the strengthening of the US Dollar against the Euro, and cost inefficiencies related to the closure of our Iowa manufacturing facility. Finally, the pension amortization expenses recognized within Cost of Sales reduced gross margin by approximately 30 basis-points. Moving on to operating expenses and earnings in the period… -5- Operating expenses in the first quarter of $115 million were approximately $2 million higher than the year ago period. The current quarter included non-cash pension amortization expenses of $1.6 million. In Q1 of last year, operating expenses reflected approximately $3 million in additional compensation costs relating to the extra week of operations. On an adjusted basis, excluding these items, operating expenses in the first quarter of fiscal 2013 increased approximately $4 million from the prior period. The increase relates primarily to higher spending in the areas of marketing and new product development and the acquisition of POSH. These increases were partially offset in the quarter by a year-over-year decrease in incentive bonus and product warranty expenses. We recognized $0.5 million in pre-tax restructuring expenses in the first quarter. These charges relate to two previously announced factory consolidation projects associated with the operations of our Nemschoff subsidiary. The first of these – involving the closure of our manufacturing facility located in Sioux Center, Iowa – is complete. The second project involves consolidating our healthcare case goods facility with an existing factory located in Sheboygan, which is being completed this week. Operating earnings this quarter were $34 million, or 7.6% of sales. Excluding restructuring and pension transition expenses recognized in the period, the adjusted operating margin was 8.4%. The effective tax rate in the first quarter was 33.5% compared to 33.3% in the same quarter last year. Finally, net earnings in the first quarter totaled $20 million, or $0.34 per share on a diluted basis. Excluding restructuring and U.S. pension amortization expenses recognized in the quarter, adjusted earnings per share totaled $0.38. With that, I’ll now turn the call over to Jeff to give us an update on our cash flow and balance sheet. [JEFF STUTZ, TREASURER & CAO] Thank you, Greg. Cash flows from operations in the first quarter were approximately $29 million. Net changes in working capital had a minimal impact on cash flows in the period, as increases in AR and inventory were largely offset by reductions in prepaid expenses. Capital expenditures in the first quarter were $16 million. This amount reflects a $6 million payment for the acquisition of property for the planned construction of a new manufacturing facility in Ningbo, China. Cash paid for dividends in the first quarter totaled $1.3 million. -6- We ended the quarter with total cash and equivalents of $184 million – an increase of $12 million from where we began the fiscal year. We made progress this quarter in our U.S. pension transition strategy. At this point the plans have been frozen and all current participants are now receiving benefits under a new defined-contribution style retirement program. The next phase of the process involves a variety of legal and administrative steps, which we anticipate will take 12 to 18 months to complete, at which time we will make the final plan contributions necessary to complete the termination process. 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 $142 million; with the only usage being from outstanding letters of credit. Given our current cash balance, ongoing cash flows from operations, and our total borrowing capacity, we are confident we can meet the financing needs of the business moving forward. That’s the balance sheet and liquidity overview. I’ll now turn the call back over to Greg to cover our Q2 sales and earnings guidance. [OUTLOOK - GREG BYLSMA] Thanks, Jeff As we indicated in our press release, we’re expecting net sales in the second quarter of between $445 million and $465 million. This implies flat to 4% growth relative to Q2 of last year. Earnings in the second quarter are expected to be between $0.17 and $0.21 per share on a diluted basis. This guidance reflects the impact from non-cash pension settlement and amortization expenses in the quarter, which we anticipate will total between $15 million and $20 million due to an increase in benefit settlements related to our transition strategy. It also includes the impact from previously mentioned restructuring actions, which we estimate will be around $1 million in the period. Excluding the impact of these pension and restructuring costs, adjusted earnings per share in the quarter are expected to range between $0.37 and $0.41. This earnings guidance assumes an effective tax rate of between 33% and 35%. As a reminder, while we have provided an expected range for non-cash pension charges expected in the second quarter, the actual amount recognized will ultimately depend on the amount of pension benefits paid out – or “settled” – during the period. As such, the amount we record could differ from our estimate. -7- Either way, we will be sure to clearly identify these charges in our reported results as we progress through the plan termination process. Several of the factors that negatively impacted our gross margin in the first quarter are not expected to repeat in Q2. We would also expect to begin capturing some benefit from the price increase that went into effect at the beginning of September. Accordingly, we are forecasting a Q2 gross margin in the range of 34.6%. Finally, total operating expenses in the second quarter are expected to be approximately $118 million at the mid-point of the revenue range provided. With that, I’ll now turn the call back over to the operator so we can take your questions. [Q&A] ________________________________________________________________ [CLOSING – BRIAN WALKER] Thanks for joining us on the call this morning - and for your continued interest in Herman Miller. We will look forward to talking with you again in December. -8-
"Herman Miller Inc First Quarter Fiscal Investor Conference Call"