Good morning, everyone. And welcome to the Herman Miller Incorporated Fourth Quarter Fiscal Year 2018 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 reports 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 CEO; Mr. Jeff Stutz, Executive Vice President and CFO; and Mr. Kevin Veltman, Vice President, Investor Relations and Treasurer. Mr. Walker will open the call with brief remarks, followed by a more detailed presentation of the financials by Mr. Stutz and Mr. Veltman. We will then open the call to your questions. [Operator Instructions] At this time, I would like to begin the presentation by turning the call over to Mr. Walker. Please go ahead.

Good morning. And thank you for joining us. I'll begin the call today with a brief overview of our results for the quarter and full year. After that, I'll provide a review of our five key priorities for the business. I'll close with an overview of the current economic backdrop before I turn the call over to Jeff and Kevin to provide a more detailed picture of our financial results. Sales of $618 million for the quarter were a record and represents growth of 7% over the same period last year. The segment level, our international and consumer businesses also achieved their highest ever sales for a quarterly period and both segments, along with the specialty group, posted double-digit growth over last year. Order growth with a consolidated level of 9% was broad based across all of our business segments. Our international business delivered another period of impressive organic growth, posting a year-over-year increase of 20%. This was complemented by 12% order growth in both our Consumer and Specialty segments. Perhaps most encouraging was the improved momentum we saw this quarter in the North American Contract business, which delivered organic order growth of 4%. We reported earnings per share on a GAAP basis of $0.53 for the quarter. On adjusted basis, which excludes certain restructuring and other special charges for the quarter, we reported earnings per share of $0.66, an amount well ahead of our expectations coming into the quarter, driven by the above forecast top line. For the full fiscal year, net sales of $2.380 billion [ph] were a record and reflected growth across each of our business segments. The organization did a great job of managing operating expenses over the full year, which helped to mitigate gross margin pressures. We also benefited from lower U.S. statutory tax rates…

Thanks, Brian. And good morning, everyone. So before we take a closer look at our consolidated results for the quarter, let me take a few moments to provide some additional information on the Maars and HAY transactions. On June 6th, we announced our intent to acquire an ownership position in Maars Living Walls, a global designer and manufacturer of modular wall systems. The transaction, which we expect will close later this month, will give us a 48% equity interest in Maars for a cash investment of approximately $6 million. Revenue from Maars in the most recently completed fiscal year totaled approximately $65 million. We expect to reflect our share of Maars operating results with an equity earnings from non-consolidated affiliates going forward. On a GAAP basis, this transaction is expected to be approximately $0.01 dilutive to earnings per share in fiscal 2019. On an adjusted basis, which excludes the estimated impact of certain purchase accounting adjustments, the transaction is expected to be approximately breakeven to earnings per share in fiscal 2019. As we look forward, we estimate this Maars investment will be $0.03 to $0.06 accretive to earnings per share in year 5 and that's based on our initial ownership percentage. Closely on the heels of the Maars announcement on June 7, we acquired a 33% equity interest in HAY through a cash investment of approximately $66 million. Revenue for HAY in the most recently completed fiscal year totaled approximately $155 million and the business has grown at a rate of 14% per year over the past four years. HAY's existing business reflects a revenue mix of approximately 60% consumer, 40% contract. We expect to reflect our share of HAY operating results with an equity earnings from non-consolidated affiliates going forward. On a GAAP basis, this equity investment is expected…

Thanks, Jeff. We ended the quarter with total cash and cash equivalents of $204 million, which reflected an increase of $11 million from last quarter. I would note that we will use $77 million of this cash in the first quarter of fiscal 2019 for the HAY and Maars equity investments that Brian and Jeff discussed earlier. Cash flows from operations in the fourth quarter of $56 million compared to $80 million generated in the same quarter of last year. The amount was lower primarily driven by changes in working capital from higher accounts receivable and prepaid expense levels compared to last year. For the full fiscal year, cash flows from operations were $167 million compared to $202 million in the prior fiscal year. Capital expenditures were $20 million in the quarter and $71 million for the full year. Looking ahead to fiscal 2019, we anticipate capital expenditures of $90 million to $100 million for the full fiscal year. This includes an estimated $5 million to $7 million related to the build-out of the HAY North American footprint next year. Cash dividends paid in the quarter were $11 million and $42 million for the full year. The dividend increase that we announced yesterday increases our expected annual payout level to approximately $47 million. We also returned cash to shareholders through the repurchase of $16 million of shares during the quarter and $46 million for the full year. We remain in compliance with all debt covenants and as of quarter-end, our gross debt-to-EBITDA ratio was approximately 1:1. The available capacity on our bank credit facility stood at $167 million at the end of the quarter. Given our current cash balances, ongoing cash flows from operations and our total borrowing capacity, we remain well positioned to meet the financing needs of the business moving forward. With that, I'll turn the call back over to Jeff to cover our sales and earnings guidance for the first quarter of 2019.

Okay. So with respect to the forecast, we anticipate sales in the first quarter of fiscal 2019 to range between $610 million and $630 million. Now this forecast includes the impact of adopting the new accounting standard for revenue recognition. Upon adoption at the start of fiscal 2019, we will begin recording certain dealer payments as expense within cost of goods sold that were previously classified as a reduction in net sales. This change will effectively increase our reported net sales going forward. Now it's important to note that while this classification change will have zero impact on reported gross profit dollars, the change in net sales will result in a roughly 60 basis point reduction in gross margin percentage at the consolidated level. This is an important point of emphasis for your modeling going forward, given the impact on year-over-year comparability of gross margin percentages. The data supplement included with last night's earnings release provides a comparative breakdown of the fiscal 2018 amounts impacted by this change in accounting standard. This will assist you in adjusting last year's reported numbers to a comparable basis with the new method that will be applied going forward. You should also note that we will include the impact of this change in determining organic sales and order calculations in future periods. With that in mind, our midpoint revenue forecast for the upcoming first quarter implies an organic increase of 6% compared to the same quarter last fiscal year. We expect consolidated gross margin in the first quarter to range between 36.25% and 37.25%. Considering the impact of the accounting classification that I just described, the midpoint of this gross margin forecast is roughly in line with our performance in the first quarter of last fiscal year. This estimate reflects our latest view on…

Thank you. [Operator Instructions] Thank you. Our first question will come from Matt McCall with Seaport Global. Your line is open.

Thank you. Good morning everybody.

Hey, Matt.

Great quarter. Great reaction here. So maybe I'll start with the profit enhancement initiatives, appreciate the detail, I wasn't able to maybe understand it completely. Can you maybe look at it this way, what was the net impact of the profit enhancements? Because I think you said in addition to what you're doing to help profitability, you're seeing small set of deflation -- or inflation. You're investing and obviously, you're working toward that goal. But can you talk about the net impact in '18, and then what you expect from these initiatives, net of those offsets in '19 and '20?

So Matt, this is Jeff. Let me start - maybe take these in reverse order and kind of look forward. I think Brian in his opening comments laid out the expectation that - I mean based on everything we can see today, which is [indiscernible] as you know, but we -- based on current steel pricing, the price we paid on average in the fourth quarter and our expectation for other commodity input costs inflation, we expect somewhere between $15 million to $20 million of annualized inflation impact going forward. So roughly speaking, somewhere on that order -- maybe towards the lower end of that range in fiscal '19, because some of that will ramp in. Now we expect that by the time we get the remaining profit optimization efforts put in place, we'll be somewhere net between - which, by the way, is $30 million to $60 million was the range that we give of incremental benefit yet from the various initiatives we have in place, that gives you something on the order of $15 million to $40 million of net benefit after the impact of inflation. That's just on an annualized basis based on everything we can see right now. And admittedly, that's a pretty wide range, but you can understand the most recent project optimization effort within North America has just recently kicked off, but we're gaining line of sight to the benefits there. So that's kind of a go-forward basis. If you take a look at -- now FY '18 impact, really we've -- I think, Brian said in his opening comments, the $30 million of run rate savings that we have implemented thus far or to date comes mainly from two areas. We -- 18 months ago, we announced this cost reduction program. That goal was to achieve $25 million to $30 million of grossed annual savings. We estimate we're at a run rate of about $23 million today. And then the second project related specifically to our consumer business, and we estimate that, that's at about an $8 million annualized run rate today. So we think we've captured about $30 million to date. Unfortunately, all of that to date has really gone toward offsetting the impact of discounting pressure and commodity. So we haven't been able to net any net benefit to the bottom line as yet, which is why we're continuing to consider this a corporate priority. Let me pause and...

Jeff, just a point of clarity, Matt. So we didn't get a full 30 in fiscal '18 either. That was a run rate in the fourth quarter. So just to be clear, I don't know, Jeff, you know the number of the top of your head. I'm going to guess, it's probably more like 15 million to 20 in the year.

It was incremental, I could tell...

If you took the total year, but you know what's happened with commodities and pricing, and you can see it if you just look at the operating margin line, despite the fact that we went out and did that work and operating margins haven't moved. So that would tell you that, that's where you're seeing the offset. Does that makes sense?

Yes, it does. So the 15 to 20 that ends up being what was offset by the inflation that you saw this year -- the discount that you saw this year?

Yes, hold on, because I know this - I know this can get confusing. So let's just try to make this really simple. The total program of the three elements that we talked about, what we originally kicked off, what we did with the work around the consumer business and what we expect from this new tranche of work, we think the total of all of those things is $60 million to $90 million, okay, when fully implemented. Is that clear?

Yes.

Okay. So if you look at the first $30 million of that, what we said is hey, look that's gone largely already to offset inflation in pricing on an annualized run rate, right? So we kind of go, hey, we have $30 million to $60 million from this point forward to go get, that will be - could be net positive. However, as Jeff mentioned, we're still seeing inflation run up, which we think is another 15 to 20. So if you look at it, if you get out a year-ish, what you ought to be able to do is say, hey, I started with 60 to 90, $30 million of that $60 million to $90 million that's been eaten up by inflation already, right? This gives us 30 to 60. We think we have 15 to 20 of additional inflationary pressure. So when you get all done, what you're going to see drop through it is 15 to 40 million net benefit. Does that make sense?

It does. So is the timing of that 12 months? Or does it stretch out into next year? I know you said at one point you're going to see some benefit in Q4, but I wasn't sure -- I don't remember what that was about.

Yes, so Matt, let me try to clarify that, as we -- our guide for Q1, obviously, contemplates this, but we expect that, that inflationary pressure, the $15 million to $20 million of incremental impact, will layer itself in such that we start to feel 2 to 3 of it in Q1, somewhere between 3 and 4 in the second quarter and then by the time we get to second half, we should be at kind of a run rate of that 15 to 20 incremental impact. Of the three optimization projects that we have in place though, we think even beginning in Q1, we can largely offset the initial impact of this inflation. So we think we've got that covered, but it won't be till the second half of fiscal 2019 that we start to really feel the positive - incremental positive impacts of these programs that, we think, will more than offset the inflationary pressures. By the time we get to the end of FY '19 and this is where it gets cloudy because it's early days on the latest program, but we have growing confidence that we will be able to drive a net positive benefit based on the inflationary exposure that we see today.

And to be clear, that does have an assumption, in the way Jeff just laid that out, it will continue to gain some benefit from the price increase we announced in February and, of course, we're going to do other pricing in January, Matt. So there's a lot of moving parts to all this. I think, the net think you guys should walk away is, we think, we feel really good that we've been on this journey on profit optimization for 12 to 18 months and we're a bit ahead of the curve. Unfortunately, the first round of things we did have not net turned in as much benefit as we have hoped. On the other hand, we feel really good about the work we're seeing in the consumer business, and you could see it in the fourth quarter, and the work that we begun in April is really gaining good traction enough for us to feel confident that we don't need to pull forward a price increase today as much as continue down the path on these things and let the price increase -- additional price increase fall in and what I would describe a more normalized period. To be frank, some of our smaller business units, such as Geiger, will do some price increases sooner than January, but in the big scheme -- the larger business, that won't be till January. So what we're feeling is, yes, we're -- you never know where this cost inflation is going to end with all the discussions going on. We feel like we got the plans in place to handle it and enable us to still achieve the goals that we set out for you folks 12 months ago, 18 months ago. So we don't think we need to back off from our profit goals. We feel good that the impact that's happening both in the consumer business is real, and we think we have some good work in front of us in North American business. I think the way this will play out as much like it has the consumer business where we announced it, we said, hey, we're working on this, we'll come back and give you some numbers. We then refined it a quarter later in terms of timing. I think that's exactly how this will be when we get to the end of the first quarter. I think we're going to have a much better understanding of way the timing is. I think the gross number we're feeling good about and as we get into the first quarter, we'll have a better plan for implementation, that will help us know how that's going to feather into the results.

Okay, very helpful. I want to ask about the Consumer segment. You did a -- I think an 8.4% margin, it sounds like there was some benefit from some of these initiatives and if I heard you correctly, I think you said that the targeted margin there was 8% to 10% and I'm working off my memory here, but I thought we had talked about a 10% number in the past. Is that -- has something shifted? Or am I remembering incorrectly?

No, Matt, we -- the 10% or greater goal right now is for the consolidated group, we've been pretty consistent with an 8% to 10% targeted for the Consumer segment, partly because again, we kicked off this profit optimization work within the Consumer segment about a year ago, August. And as we were in the early -- kind of like we are right now with the North American project, because we were in the early phases of that. We had growing confidence, but there was enough uncertainty that we were wanting to make sure we give a range. Obviously, we achieved that level of profitability in the fourth quarter. That target is really intended to be a sustainable level of profitability within the business, albeit there's always going to be quarters where you have seasonality. So we achieved it one quarter here, we're not done, we've got more work to do, but 8% to 10% we'd still say is a reasonable range and we're hoping to hit the upper end of that obviously.

Matt, the other thing you may remember on the consumer business, we talked getting to double-digit EBITDA margins, if we get to 8% to 10% operating, we will get to that kind of 10% EBITDA margin.

It will be more like 11% to 13%.

The issue is you got a fair amount of DNA in that business from the acquisition. So I think that may be where some of your confusion comes out. I would say -- I would just echo Jeff's comments that we have, based on what we saw in the fourth quarter, growing conference at that kind of level of an annual rate is doable. We have more work that the plans are in place, they just have to get through their implementation phase. We have seen a lot of improvement in the maturity of stores, meaning before we talk about a lot of drag from immature stores, I would say we're feeling way more confident about that than we were a year ago. We've seen virtually all of our stores maybe [ph] one getting to the point that we're seeing four wall EBITDA profitability. So we're feeling good. You will see the operating profit in that segment likely be lower in the first quarter than the fourth. That is the typical seasonality, because that is a lower quarter for sales of Herman Miller products, because there isn't a Herman Miller sale in that quarter. It's a little bit less in promotional activity. So if you remember, the big quarters in that business tend to be Q2 and Q4. So just keep that in mind as you think about it.

Okay. I'm going to -- I apologize, I must take one more Andy. The ELA segment, very strong, and I know you talked about some of the macro outlook, Brian, but I'm just curious to have more detail as to what's driving that strength? And what the growth rate that you're assuming as we move out into Q1 and then beyond looks like? I just - the strength was very surprising to me. So I'm just curious as to what's driving it.

First, and I don't think we can do anything here, but congratulate Andy Lock and his team for a really great quarter and year. I mean, they've really did a great job. I would say to you, Matt, certainly it's been stronger than we would have even forecasted ourselves. I think there are three drivers. A, I think we're in the right markets. We're in markets that have stronger secular growth patterns, whether that's Asia, Latin America, even parts of Europe that we're in, that have been good, and it's been broad based. There is no one region, although clearly Latin America probably led the way for the quarter if not the year. So - but it's been pretty broad and in fact from - not from an orders perspective as much as on the revenue side, we had a little bit of negative impact this year - this quarter in Asia because of the plant relocation. So number one, we're in the right kind of markets. Number two, Andy and his team have done a terrific job of making sure we have the right people and the right products and the right distribution partners to win in those markets. And then I'd say three, I think we did a good job over about a 10 year horizon of putting operational places close enough to the customer that we can meet the requirements of the customers for service and delivery. So I think, it's a combination of those three things. I don't think it's any one thing. I do think it's a good mix of global products and locally designed products that are tailored to that market that have helped. So I think you got a good economy in those places, you got a good setup for where we're at…

Matt, this is Jeff, I might just add a little more color. Our Q1 guide for revenue implied -- we're still implying a double-digit percentage growth for the ELA segment. But as you get into Q2, I think we're up against tougher comps, right? I think, we did 16% growth in the year-ago quarter for Q2 and then as you get into Q3 and Q4, 20-plus percent growth rates. So certainly the comps will get much tougher, and to Brian's point, really probably too much to expect to continue those percentage growth levels, but structurally, that business is -- seems very well positioned to move forward with some good momentum.

Okay. Thank you, all.

Thank you. Your next question comes from Budd Bugatch with Raymond James. Your line is open.

Hi. This is Kathryn [indiscernible] in for Budd. I just wanted to talk about the Consumer segment more. Obviously, a lot of improvement there. Can you talk about what exactly gained traction to drive profitability in this segment? And where you feel you have room to run?

Well, first of all, the work that we did around profit optimization in that business was -- covered a lot of different things. Pricing, the team's done a really good job on the pricing side of getting some of those things put in place. That is looking at pricing across the assortment. I think they've done a nice job of getting those things in place. It's been a fair amount of work on the supply chain, and we've started to see some of those benefits, although those have room to run around them and certainly by looking at some of our promotional activities, frequency of promotions where they play out, is another area. So there are like two or three, four work streams that the team is working on. If you look at Q4, again, we would estimate that we were $2 million of benefit from that work, that's about an $8 million run rate. We think in the end, that work is going to be $10 million to $20 million on an - or $15 million to $20 million on an annual basis. So we have a fair amount of runway on that. I'd also say, the profitability is not coming just from that work. It's good top line growth, which we continue to see momentum on. Stores maturing, which we still have work to do there, and growth in e-commerce and some of those areas. The other thing that will start to help us more longer-term rather than the short run, the acquisition of HAY will give us new price points, it should broaden the market we can get to at, we think, attractive price points and margins for us, as well as the ability to get further leverage out of the investments we've made in things like e-commerce infrastructure and some of those things that will play strongly for us in the long run.

Yes. Kathryn, this is Jeff, two other things come to mind that I think are worth noting. You'll recall from some of our past commentary, one of the profit or value drivers we saw in the acquisition of DWR was our long-term objective of shifting the mix of products in that business to what we call the higher content of exclusive designs, included in that is Herman Miller branded product. So in total, we've actually continued to move the needle there and the overall mix of that business has shifted closer to our overall goal. We talked about moving from around 60% exclusive product mix to 70%. So we're moving the needle in the right direction on that front. And then we often don't talk about leverage in this business, but you'll appreciate that over the course of the last 12 to 18 months, the team has put in place some infrastructure to support growth in the contract business within - the contract channel within the consumer segment and some of the other infrastructure investments around website and so forth. And now we're starting to see some version of leverage against those fixed investments as well. So benefit from that.

And - a follow-up question, are you expecting to open any more studios throughout the year? Or what's your plan there?

We are. We've got - we ended the fiscal year at 32. If our plans hold throughout the course of FY '19, we should end the year somewhere closer to 30 - 37 stores in total. Two of which will be in place at the end of Q1.

Kathryn, this is Kevin. That would be about 50,000 of incremental selling square footage for next year.

Okay. A follow up question, but I'm changing gears. So you mentioned being able to change pricing without giving the list price, does that just mean less discounting to kind of come back from the cost inflation?

Kathryn, it's Brian. For sure, there is - much of the business, as you know, is driven by projects. So you can adjust, sort of, I would call it your situational or tactical pricing as you go along, that's one lever. The second lever that we can do is we have been on a very deliberate effort around building a good, better, best portfolio of products. So we can do a better job of managing how the offer gets taken to both our dealers and our customers to make sure when a customer needs a value price solution and we can actually work them down the value curve of the product without just giving up discounting. So there are a number of levers like that, that we believe we can pull on the interim. They don't have quite the same impact as a price increase or the broad based. But we think that is just part of the things we need to do as we manage our way through that process.

Thank you.

Thank you. Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is open.

Good morning, guys. This is Steven Ramsey, on for Kathryn. Looking at the Specialty segment, nice return to sales growth there, the second straight quarter of growth, which is good to see. What about margins in that segment based on the growth? And how do you look at this in 2019? And are the consultants helping with this segment at all?

Steve, it's Brian. We do not have the consultants focused on the Specialty segment. I think if you looked underneath the Specialty segment, you really have 4 components to it. You have Maharam, Geiger, the Collection and Nemschoff. Three of those four nents, the margins are, in our view, in pretty darn good shape. Maharam's above the corporate average, Geiger is slightly below the corporate average but very healthy, and the Collection is at or above the corporate average. The place that we have work to do, to be frank, in that business from a margin perspective is in Nemschoff. The margins are significantly lower there. I think that, that is a project that to get that business where we need to be is going to take us at least another 12 months. Steve Gane, who runs the Specialty group who was responsible for the turnaround of Geiger and the creation of the Collection business, is on task with this. That's why we moved Nemschoff, so that we can leverage the great resources including people that he had developed as part of the Geiger turnaround. We're quite confident that Steve has done a really good job of, A, picking the right people, we have an entire new team at Nemschoff; B, he is done a good with the team of outlining the lever that they need to pull. One of them was getting new products that have structurally better margins. We are very happy at NeoCon that they did one of the largest product - new product launches they've ever done at least in a singular family of products. And we're very hopeful that those products are going to carry structurally higher margins. I'd also say it's been a bit of a struggle operationally there. We have a new ops…

Excellent. So for 2019, just kind of broadly thinking on a full year basis, is it fair to think that there is still improved maybe top line growth rates relative to 2018? And then maybe modest margin expansion?

Steven, you're talking to the Specialty segment specifically?

Yes, sir.

Absolutely, that's our - our intention is to -- that's going to be one of drivers to hopefully achieving our stated profit goals in FY '20, and we need to make traction in '19 to get there. So, yes, that's the intention.

Great. That’s all for me. Thanks.

Thank you. Our next question comes from Greg Burns with Sidoti & Company. Your line is open/

Good morning. When you talk about turning the HAY North America business to $75 million to $100 million business, what kind of time frame are we looking at to achieve that type of level? And when we look at the revenue split for HAY about 60-40 consumer contract, is that the type of revenue split that you're looking for that business to do in North America? Or is your focus going to be primarily in one market like retail initially and then maybe grow the contract? Or is it going to grow in tandem? Thank you.

Greg, that's a five year growth horizon that we felt pretty confident in, given where we've seen HAY in other markets. I think that revenue split is going to be fairly consistent, our gut would be in North America. We will see that the early investments and ramp will be on the consumer side. To be frank, that's partially because we already have an infrastructure on the consumer side where we have been selling some HAY products already. So we have a way to go about that. Also on the Consumer business, we can work primarily from a inventory position to serve customers, so we can -- we know -- we got to meter that in on the contract side to get where we need to be. And we will launch HAY contract in the DWR side, meaning selling what we do in hospitality and those kind of things. The real question on the contract side of HAY North America will be getting a source of supply initiated so that we can make the more fast requirements for lead times as well as customization. And that's going to take a little bit of time to get in place and that'll be the driver of why you'll see one ramp slightly faster than the other.

Okay. Thanks. And then in terms of the store count, the openings you mentioned before the -- you're getting to 37, does that include the - is that DWR brand HAY? Or is that just DWR and then you're - there's some additional HAY stores that you'll be opening on top of that?

That is just DWR. One of the things we have an advantage in a couple of locations with HAY, we will be able to put HAY stores inside of what are already existing DWR locations, where we have more space than was needed. So we'll be able to open an additional door there. We also are looking at a couple of locations where we'll do a shop-in-shop. So that will be a combination of things on the HAY side on those first four, and I don't know if we'll get all four of those done next fiscal year but certainly we're trying to ramp those in as quickly as possible.

All right. Thank you.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Brian Walker for closing remarks.

Thank you all for joining us today. I know we had a lot to throw at you. I hope it was helpful to you as you continue to think about Herman Miller and the progress we're making. We're really thankful for the great work of our employee owners across the globe both in the quarter and for the fiscal year. And we wish you all a great 4th of July Holiday. Talk to you soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.