Good morning everyone and welcome to the Herman Miller Incorporated First Quarter Fiscal Year 2016 Earnings Results conference call. This call is being recorded. 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 report on Form 10-K and 10-Q, and other reports filed with the Securities and Exchange Commission. Today’s presentation will be hosted by Mr. Brian Walker, President and Chief Executive Officer; Mr. Jeff Stutz, CFO, and Mr. Kevin Veltman, VP of Investor Relations and Treasurer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of financials by Mr. Stutz and Mr. Veltman. We will then open the call to your questions. We will limit today’s call to 60 minutes and ask that callers limit their questions to allow time for all to participate. At this time I’d like to begin the presentation by turning the call over to Mr. Walker. Please go ahead.

Good morning everyone. Thank you for joining us today. In yesterday’s earnings release, we announced a quarter of encouraging results, demonstrating the progress we’re making against our strategic and operational initiatives. As we noted on our fourth quarter earnings call, we ended fiscal year 2015 on a positive note with steady improvements, and we’re pleased to see that that momentum continued into the first quarter of fiscal 2016. This is particularly true as it relates to our North American segment, where organic order growth of over 7% was double the level we reported last quarter. At a consolidated level, we delivered sales in-line with the upper end of our guidance and posted our highest operating margin performance in over six years. These factors contributed to a very strong bottom line performance, well exceeding our EPS estimates. I’ll begin the call this morning with a review of our progress and performance for the quarter by business segment. I’ll then turn it over to Jeff and Kevin to cover the first quarter results in more detail. Looking at our headline numbers, we reported consolidated net sales in the first quarter of $565 million, which were at the high end of the guidance we’ve provided in June. Earnings per share of $0.56 came in ahead of our expectations, driven by continued strong gross margin performance and well managed expenses. At a macro level, our gains this quarter were achieved against a backdrop of mixed global economic conditions. The U.S. has experienced a generally positive environment with a growing service sector labor market, positive institutional ABI trends, and improved levels of non-residential construction, all of which boded well for continued industry growth in North America. Outside of North America, there are areas of economic uncertainty that we are watching closely. These include China, Brazil,…

Well thanks, Brian, and good morning everyone. Consolidated net sales in the first quarter of $565 million were 11% higher than the same quarter last year. Excluding the impact of Design Within Reach and foreign currency translations, sales increased almost 8% from the prior year. Sequentially, net sales in the first quarter were up 3% from the fourth quarter level, while orders improved 1%. Within the North American segment, sales were $338 million in the quarter, representing a 5% increase from the same quarter last year. Adjusting for the impact of foreign currency translation, segment sales were up nearly 7% on a year-over-year basis. New orders in this segment totaled $332 million in the first quarter. This reflects an increase of 6% from last year on a reported basis and an organic increase of over 7%, which as Brian mentioned, marks the second straight quarter of improvement on a year-over-year order trend. Our ELA segment reported sales of $103 million in the first quarter, reflecting an increase of 7% compared to last year. New orders were $108 million, representing a year-over-year decrease of 3%. Excluding the negative impact of currency translation, however, segment sales increased almost 19% and orders were up 8%, driven by strong project activity in Australia and the United Kingdom, as well as Japan and India. Sales in the first quarter within the specialty segment were $58 million, an increase of 6% over the same quarter last year. New orders in the quarter of $58 million increased 2% from the year-ago period. Geiger and the Herman Miller Collection were the major contributors to sales growth in the period. As Brian outlined at the start, the consumer segment had a lot of moving pieces this quarter. In total, the consumer business reported sales of $67 million in the…

Thank you, Jeff. We ended the quarter with total cash and cash equivalents of $52 million, a decrease of $12 million from where we ended last fiscal year. Cash flows from operations in the period were $33 million compared to $42 million in the same quarter of last year. Changes in working capital resulted in a net cash use of $18 million this quarter compared to a net cash inflow of $5 million in the prior year quarter. The largest contributors to the change in working capital were higher accounts receivable and inventory levels offset by the timing of payments for accrued liabilities. Capital expenditures in the quarter were $17 million. We anticipate capital expenditures of $70 million to $80 million for the full fiscal year. We also made further progress this quarter paying down the debt incurred in the acquisition of DWR with a repayment of $22 million in borrowings during the quarter. This brings our remaining outstanding acquisition debt to $18 million. Cash dividends paid in the quarter were $8 million. As a reminder, last quarter we announced an increase of over 5% in our quarterly dividend rate that will be paid beginning in October. This increase brings our annual cash dividend payout to approximately $35 million. We remain on compliance with all debt covenants, and as at quarter end gross debt to EBITDA ratio was approximately 1.1 to 1. The available capacity on our bank credit facility stands at $171 million. 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. With that, I’ll now turn the call back over to Jeff to cover our sales and earnings guidance for the second quarter of fiscal 2016.

Okay. With respect to the forecast, we anticipate sales in the second quarter to range between $570 million and $590 million. We estimate the year-over-year impact of foreign exchange on sales for the quarter to be approximately $13 million, so on an organic basis adjusted for FX, this forecast implies revenue growth of approximately 5% at the midpoint of the range. Consolidated gross margin in the second quarter is expected to range between 37.5 and 38%. Our starting backlog reflects a combination of larger projects and slightly less favorable product mix than we saw this past quarter. Accordingly, we expect gross margin at the midpoint of our revenue range to be slightly lower than what we reported in Q1. Operating expenses in the second quarter are expected to be between $164 million and $168 million, and we anticipate earnings per share to be between $0.52 and $0.56 for the period. This also assumes an effective tax rate of 32% to 34%. With that summary, I’ll now turn the call back over to the operator and we’ll take some questions.

[Operator instructions] Our first question comes from Kathryn Thompson with Thompson Research. Your line is open.

Hi, thanks for taking my questions today. The first on the North American segment and the margin upside that you posted in the quarter, how much of this improvement is driven by your strategic initiatives that you’ve been flowing through versus overall improvement, and then how sustainable are these margins on a go-forward basis?

Hi Kathryn, this is Jeff. We listed a number of positive factors on the margin for the quarter, so we benefit in a big way from higher production leverage, so it’s a little hard to parse out whether this is the strategic initiatives for sure. We highlighted that we doubled our order growth in the quarter relative to what we posted in Q4, so without a doubt we’ve benefited in a big way from higher production that rolls through in the form of better leverage of fixed cost, but I think you’d have to somehow tie that together and attribute that to the strategic moves that we’ve made. In fairness, though, we did benefit, particularly early in the quarter from a really favorable product mix, and as I mentioned in my overview comments, net price realization. You recall we did a price increase this past February, so we did see some benefit flow through from that; but toward the latter part of the quarter, we saw some larger projects layer into the backlog. We also saw a bit of a shift in product mix, nothing in the way negative, but just a different product mix that causes us to guide down a bit on the margin. So I’d say on balance, we’ve always said in this business if we can keep factories moving and keep volume running through, we can leverage quite well. We saw that this quarter. I think that part remains true for the business if we can keep that top line moving, but I think we did see a bit of shift in the profile of the backlog and that’s going to probably cause a bit of depression on the gross margin in Q2 as we guided.

So really, what you saw in the quarter was the benefit of mix in addition to better leverage, but you really aren’t seeing the full impact of your strategic repositioning. Is that a correct kind of summation?

Kathryn, this is Brian. Good morning, by the way. I think that depends on how you ask that question. Certainly, the strategic repositioning, if you ask that question for the business in total, not just North America, and I think that’s where your question is, it is a little hard to answer the way you described it. If you ask about the things we’ve done overall and the shift strategy to get into areas like the specialty business, businesses like the consumer business, those things clearly are driving higher margins, there’s no doubt about that as well as the things we’ve done to put operational improvements into some of those specialty businesses and some of the improvements we’ve seen in places like Maharam and specific actions we’ve taken. So yes, the strategic things we’re doing are driving higher margins. If you look at the North American segment in particular, we’ve done--as you all know, we took several actions last year beginning in the third quarter, really gaining steam in the fourth quarter. Those actions were driven to be able to help us capture our fair share, if you will, of wherever the industry was going. As we capture those things, certainly that drives volume, that drives margins. There is also clearly the work that the operational team and Greg Bylsma and others have done has been either how do we realize margin, but maybe more importantly, how do we make sure that we can be competitive at a value point as well as a solution point. Now that may not drive higher percentages, but in fact if we could be more competitive on project and capture more volume, that shows up in leverage, if that makes sense to you. So I think it’s hard to describe those things as unrelated, but much of the margin movement we’ve seen, I think fairly consistently over the last four or five years has been as we’ve gotten into some of these newer areas that are higher margin. That clearly is one of the drivers we have been focused on and trying to implement.

Okay, helpful. The follow-up on the new large format stores that you’re going to be rolling out this fiscal year, what is the net square footage increase, because I know that you’re going to be revamping existing stores, but what’s the net overall anticipated increase for fiscal ’16? And then as you roll those out, understanding there are certain costs to rolling out this strategy, how should we think about margins as you’re rolling out--for the consumer segment as a whole as you’re rolling out those additional large format stores? Thank you.

First off, best guess we’ve got right now is that the net increase is about 55,000 square feet. Some of those we don’t even have a--you know, we’ve got one that we don’t even have a space identified yet, so that’s a bit of a forecast, because we’ve got to find the right space. Also, it’s important to keep in mind that some of those will be back end loaded in the back end of the year, so as I noted in my prepared comments, two of them will be opening in next month. Both of them, I believe, are replacement stores where we’re going to larger stores, so there’s a net add in square footage but you’ve got to add and subtract. There is some crossover sometimes where you end up with both of them open. Jeff, remind me - the numbers we gave for the total cost of opening doors?

The capital tends to run around $1.5 million on average to open, and in terms of opex impact per store, and this includes things like if you have some crossover, duplicate rent and so forth, it’s up a couple hundred thousand dollars, 200K to 300K typically in a quarter.

Okay, great. Thank you. My final question for today is we’ve just seen so much in our research, both in the early construction part of the cycle and then the latter part of the construction cycle, there’s a continuing theme of a very tight construction labor market. What product solutions do you have or are you developing to help specifically address this issue? Thank you very much.

Kathryn, I guess [indiscernible], I don’t think that--you know, most of our folks that are involved in implementing solutions for our customers don’t come from the same labor pool as the construction guys. There is some crossover in some states or some markets where you might have union labor that might be carpenters unions and those kinds of things, but I would say that’s a fairly minor impact for us. If there’s a place that we’re impacted, it is by trying to make sure that we have the easiest products, most efficient products to install, because obviously the more products they can install for less. One of the ways that we’ve gone after that over the last number of years is using the Herman Miller performance system to help our dealers improve the efficiency of their installations, which both takes out labor, takes out time, and in fact improves quality. So I guess in that case, it’s less about product as much as it is about process.

That was really more the angle I was drilling down. Helpful, thank you.

Our next question comes from Matt McCall with BB&T Capital Markets. Your line is open.

Thanks. Good morning, guys. Maybe start with the SG&A this quarter. Brian, or maybe it was you, Jeff, that mentioned the product boot camp, and I recall there was some training issues, you had some feet off the street earlier or last year. First, can you talk about any incremental cost that was tied to that product boot camp? It sounds like it was a new initiative year-over-year, and was there an instance in the quarter where you had some increased levels of feet off the street for a period of time?

Matt, first let me address the feet off the street question. We were very, very deliberate that this was literally what it sounds like - it was a boot camp. People were in and out, and it was a big mix between our folks and the dealers, and we got them in and we got them out of here fairly quickly on purpose. One of the other things we did is we did it all, and one reason we set up the location the way we did is we could bring them in, one location, they came in one night, and in fact to be frank, we did it over the weekend so that they weren’t always gone from their day-to-day jobs. So I think effective selling time lost was very, very minor, and in fact I think the report so far is that the training was so effective that most the sales folks said, it gave them very specific help on very specific projects where they could go back home and implement right now. So net, and it’s always hard to say, I don’t believe we had any loss of signal strength based on what we did, at least that’s the report we’re getting back so far from both the dealers and our people as saying, it’s a net add. Those things are always hard to tell, but I would say our reviews right now are very, very positive, and in fact if anything, we’re getting asked whether we would run another round of it because we didn’t get everybody across the country through it, because we were very targeted about who we brought in. So incremental costs, there certainly was cost that we had in the quarter to do things like we reset one of our facilities. There was some cost around product. Some of that probably got capitalized--

Yes.

Certainly some design [indiscernible]. In some ways, what we did, Matt, around this was we largely--if you can imagine, we reprioritized what people were working on, what they were spending versus trying to spend incrementally. So we put it from something else so that we could get that work done as quickly as possible. Most of it was internal labor, and in fact the dealers actually paid for their own travel to get here to west Michigan to come in and do the training. So there wasn’t a huge amount of incremental dollars as much as there was incremental effort.

Okay, got it. So I guess the next question, again on SG&A, it looks like you de-levered that line Q1 on a year-over-year basis. It looks like the guidance implies no incremental leverage on a year-over-year basis and no incremental leverage on a sequential basis, even though the top line looks a little bit better. Can you talk about what’s driving that, how long it’s going to last? Do we see leverage return in the back half?

Matt, this is Jeff. So first, let me take you back. We talked last quarter on our call that we expect operating expenses - this is as we move through fiscal ’16 to reflect some incremental investments related to showrooms, some of the new studio work that Brian alluded to, much of which we haven’t actually addressed yet in the first quarter, and the impact of other things like currency and higher incentive bonus expenses. We thought that those factors largely would drive towards the back half of the fiscal year. If you consider what we’ve guided--let me take this angle to answer your question. If you consider our guidance for Q2, say at the midpoint, you’d say it looks like we’re expecting to average total operating expense of about $164 million per quarter through the first half. Now of course, we’ve got seasonality, so we don’t know - it doesn’t tend to be flat, but just on an average per quarter, $164 million. We think it’s reasonable, given those factors that we outlined last quarter, that you could see $2 million to $4 million of incremental operating expense spend per quarter above what we’ve averaged through the first half in the second half of the year. So if we averaged $164 million through the first half, we could see that be as much as $2 million to $4 million higher in the back half per quarter. On a contribution margin perspective, we think that we can leverage somewhere between 10 and 15% moving through the back half of the year, and then increasing toward a more historical 20 to 25 as we get past those items, but that would be kind of post-FY16. Does that help?

It’s very helpful, Jeff. Thank you. So the contribution margin you just mentioned, 10 to 15% is inclusive of the higher SG&A spend, the $166 million to $168 million, and is that year-over-year contribution margin?

Correct.

Okay, all right. I have to do some more math. All right. So the last question, Brian, maybe for you, I think Jeff talked about some of the project wins and the mix impact on your margins, or expected margins. Can you talk about some of those project wins? Can you talk about the health of the cycle? Any of those project wins from new customers that are resulting from some of the moves? Just how are you feeling about the cyclical health and how much of the project success was maybe new customers?

Matt, first of all, I think the cyclical health is pretty good, particularly in North America. I mean, it’s a little harder, as I’m sure you guys--you know, you guys are reading the same stuff I am. Globally, it’s a little more of a mixed picture, particularly as you look at markets where you’re more of an importer versus [indiscernible]. The good news is over time, we’ve moved a lot of our production to be regional. That helps a bit with that, but certainly global markets are a little tougher. The North America market, though, right now from everything I can see and any data we can read that the industry collects, the cycle looks pretty robust still and looks like it’s got legs. So that part, we feel pretty good about. Of course, we don’t know what everybody else is producing in their results. We’re just reading the macro data, but it looks pretty good to me overall. From a project win standpoint, I’d rather not go into names, of course. I would say yes, we had some competitive wins. You’re always out there competing for existing customers and some new ones. We had a couple of good wins that were competitive that added some new customers to our rolls and our dealers. I think the thing that is most encouraging, I think the team has done a really good job of getting some new solutions to help us, changing some processes of how we’re interfacing with the dealers and with our sales teams. I think the sales team is really energized right now. One of the things that happened at the product boot camp when we brought people is often one of the things that--making sure that they are keeping up with the expansion and the offer, it is hard work. I think no matter what we put in the showroom, it’s difficult to show the entire breadth of what we have on offer today, and one of the real benefits of bringing them back was they could see not only the Herman Miller product, but we highlighted everything across the entire family, from Herman Miller to Geiger to Nemschoff, even DWR, Maharam, the Herman Miller Collection. People saw everything in one place, and I think that’s really sparked both the dealers and our sales people, and that helped us in some of those competitive situations where people have said, wow, the offer is broader than maybe even what I’ve been thinking about. I think that’s what’s been helping us a bit on some of that competitive side.

Perfect. Thank you, Brian.

Our final question comes from Budd Bugatch with Raymond James. Your line is open.

Good morning Brian, Jeff and Kevin. This is Bobby actually filling in for Budd. Congrats on a good quarter and congrats on the nice improvement in North American office.

Thanks, Bobby.

A couple questions on DWR for me. Can you update us on what the current breakout is between the large formats and the small formats inside the 32 net stores at the end of the quarter?

Yes Bobby, this is Kevin. DWR, it’s roughly on the large format, we’re about a third of the way through the total stores on that front.

So I was just trying to get to, out of the 32 stores that ended the period, how many of those currently right now are large formats? A third, is that what you’re telling me?

Yeah, I think it’s pretty close to 10, Bobby. I don’t know if that includes the two that are going to open next month or not. That does not include them, correct? So we’re 10 and we’ll be 12 probably by the end of the next quarter.

That’s right.

Okay, that’s perfect. That’s exactly what I was looking for. Then on the plan for closures, how many of the small formats do you plan to close of the remainder? You closed one this quarter.

That’s a great question, Bobby. I don’t know if I have that in front of me. You know, those kind of come up as leases expire, and what you’ll often get is--like, Scottsdale, Arizona is a great example. There’s a current store and there’s a smaller format, so when the new one opens next quarter, the older one will close shortly thereafter, so there’s a little bit of an overlap, so that’s an example. I think the other location that opens next quarter is exactly the same thing - I think we’ve got a current existing store that will close within a few months of each other. So the other one next quarter is just an expansion of an existing format, so you’re going to see--what we did is we’ve got a location where we were able to get the space next door, so we’re just expanding. Do you follow what I mean?

Yeah, I follow, relocation or just an expansion of the existing format. I was just trying to get around to the net number of stores to try to model this year to end the year with, so mix the new openings with the closures and the relocations.

I think right now, we’re probably at the low water mark for the year, is my gut, if I remember right from the data guys. I think we end this year back up around 34, 35, maybe 36. Remember, we actually said we would drop from the beginning of 35, we would come down, and then we would eventually get back up to even. I think it’s as we get into next year, we get back--middle part of next year, Bobby, I think we get back up to 38, if I remember right. Now to be frank, one reason is simple an answer, is a, we’re out scouting for locations, so some of that depends on when we find the right location with the right demographics, and we’re constantly in that battle of prospecting on where you think the best next location is going to be.

Okay, I appreciate that. Then Brian, maybe for you, I understand the year-over-year shift in the timing of the Herman Miller sale and how that kind of hurts the comparison this year versus last year, but can you maybe talk a little bit about DWR business has trended lately over the last two months? We’ve seen some pretty good data out of some competitors with the top line from Restoration Hardware and some pretty good census bureau data for the retail sales, so I’m just trying to kind of match all of the endpoints up together.

Well, I think we gave that we think it’s been running--DWR alone, this is always a little funny, Bobby, because we’ve got stuff moving--to be frank, like we’re closing stores, we’re also closing some wholesale customers, so if you look at our consumer business in total, you won’t necessarily see this. It looks flat right now, which obviously isn’t where we want to be. DWR, if you take the total of DWR, it looks like it’s more in that 3% range, and that’s looking through the fog of all the noise that’s going on. Part of that is going to be impacted by having fewer doors open, because while we’re gaining more square footage, which we think is positive longer term, when you close a location you don’t necessarily move those customers over from one spot to another automatically. So we’ve got some things to wash our way out of that. We feel really good about the way that the large format stores look. They're running heavier than the 3%, so that’s kind of looking at the sum total. Other thing, if there is a positive in DWR, it’s been on the contract side. I think we’re in the early innings of really getting our contract dealers connected to the offer at DWR. The boot camp was a start towards that, so I think we still have some positive underneath trends that are not just even in the macro data but in our control. It’s just going to take us some time to get through what I’ve called internally sort of a crossover between location, size of store, and the movement between wholesale business to our own dot-com and DWR. To be honest, if there’s anything that I think we would all say didn’t go as well as we would have liked, we didn’t pick up as much business from that wholesale side back to us as we would have liked over not only the last three months but the last six months. We saw it in the fourth quarter, but it was sort of masked by this movement in the sale, and now this quarter you really saw it. So as we get through Q2, I think we’ll have a better read on how we’re doing at executing those plans.

Okay, I appreciate that color. It’s very helpful. Lastly from me, just on office, canvas dock was one of the big products you guys mentioned getting out there to have a big impact. Was that part of the driver of the nice improvement this quarter?

We’ve certainly had some wins with canvas dock. Canvas dock is also one of those one of those things that it has sort of the effect of cargoing other things along. It’s probably right now showing up more in the order side more than it’s showing up in shipments, because order entry, I think, started if I remember right, in late April. So we’re out there winning projects with it, but we probably haven’t seen much in terms of revenue yet. That will probably start to hit more in Q2, I would guess.

Yeah Bobby, this is Jeff. I would just tag onto that, that’s one of the factors when I alluded to the mix of backlog, that’s one of the factors, is we’ve seen a ramp-up in activity on canvas dock, which is great, but it’s changed the mix in the backlog coming into Q2 versus what we saw coming into the first quarter.

All right, that makes sense. I appreciate the color. Thank you for answering my questions, and best of luck through the remainder of the fiscal year.

Thanks.

That does conclude the Q&A session. I will now turn the call back over to Mr. Brian Walker for closing remarks.

Well, thanks everyone for joining us. We appreciate you being with us today and your continued interest in Herman Miller. We look forward to reporting further advances in December and the opportunity to talk to you again. Have a great day.

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may all disconnect, and everyone have a great day.