Herman Miller Q3 Earnings Call Transcript

123jump.com Staff
23 Mar, 2010
New York City

The office furniture systems and products maker net sales declined 7% to $329.6 million in the quarter. Net quarterly earnings were $8.3 million helped by better margins and lower restructuring charges. The company gained 12 cents a share compared to a loss of 10 cents a share a year-ago quarter.

Herman Miller, Inc. ((MLHR))
Q3 2010 Earnings Call Transcript
March 18, 2010 9:30 a.m. ET

Executives

Brian C. Walker – President, Chief Executive Officer & Director
Gregory J. Bylsma - Executive Vice President & Chief Financial Officer
Jeff Stutz - Treasurer & Vice President Investor Relations

Analysts

Mark Rupe - Longbow Research
Todd Schwartzman - Sidoti & Company, LLC
Sean Connor - BB&T Capital Markets
Budd Bugatch - Raymond James & Associates

Presentation

Operator

Good morning, everyone and welcome to the Herman Miller, Inc. third quarter 2010 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 Chief Executive Officer; and Mr. Greg Bylsma, Executive Vice President and Chief Financial Officer.

Mr. Walker and Mr. Bylsma are joined by Jeff Stutz, Treasurer and Vice President, Investor Relations. Mr. Walker and Mr. Bylsma will open the call with a brief presentation, which will be followed by your questions. We will limit today’s call to 60 minutes, and ask that all 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. Brian Walker. Please go ahead.

Brian C. Walker

Good morning and welcome everyone.

As the harsh reality of the economic downturn unfolded over these past 18 months, positive news in the business world became increasingly rare. For businesses in general and certainly within our own industry talk of “growth” has been largely reserved for describing a future state rather than a current reality. This makes what in other times would be disappointing results encouraging. After five consecutive quarters of double-digit declines, our consolidated orders increased in the third quarter – yes, they grew - by 4% compared to the prior year.

Despite recent headlines on healthcare reform, consumer confidence, and ongoing economic concerns in the Euro zone, our international, healthcare, retail, and learning vertical markets have provided needed ballast to our business. While order rates within our core North American operation have continued to lag the prior year, our diversified vertical markets have shown remarkable strength in relation to where we were at this time last year. This reflects a marked improvement in the performance of our business during a down economy, and is the result of a deliberate strategy to expand the potential of our revenue base in recent years.

As expected, order levels in this quarter were down relative to Q2, reflecting the typical seasonal slowdown through and immediately following the holiday period. We have historically seen a drop in order pacing during December and January, followed by a ramp-up beginning in late February and continuing through the balance of the fiscal year. This historical ramp-up in the Q4 order pattern has been wide-ranging in recent years. At best, this has made for difficult sales forecasting in our fourth quarter even during strong economic times. Clearly, the current state of economic uncertainty makes this even more of a challenge this year.

Despite lower sales on both a year-over-year and sequential-quarter basis, we were solidly profitable in the third quarter; achieving an adjusted operating earnings percentage of 5.8%. Our teams once again did a great job managing expenses in line with revenue levels, and as we pointed out in our press release, a number of cost saving initiatives remain in place including reduced work schedules for the majority of our employees. We also made good progress this quarter on our two plant consolidation projects – one in Seattle and one in West Michigan. These projects are on track to be completed in the fourth quarter of this year, with the anticipated cost savings beginning in the first quarter of fiscal 2011.

To be sure, the health and direction of the global economy remains a question that only more time will answer. Meanwhile, our order growth and continued profitability this quarter leave us encouraged that we are taking positive steps in the right direction. As always, we will continue to balance our focus on near-term profitability and cash flow with a longer-term view of the commitments and goals outlined by our strategy. We recognize that achieving this balance requires the willingness to boldly pursue investment opportunities that offer long-term growth potential – even at a time of financial stress. That was certainly the case with the acquisition of Nemschoff earlier this year. Our internal product development efforts also play an important role in achieving this balance, and we have continued to be encouraged by the level of market acceptance of our newest products – particularly our Setu and Embody chairs.

Whether through internal development, strategic acquisition, or alliance partnerships, we remain committed to delivering thoughtfully designed, innovative, and affordable products that will allow our dealers to win and retain business; and our end-user customers to improve their environments.

This quarter, we were thrilled to announce a new alliance relationship with Trainor Modular Walls, a division of Trainor Glass Company. Through this alliance, Trainor’s demountable walls, doors, and hardware will be distributed exclusively through our North American dealer network. This partnership will significantly enhance our ability to create adaptable interior space solutions for our customers.

Finally, we remain dedicated to furthering our position and reputation as a thoughtleader in our industry. This quarter we were once again honored as our industry’s sole representative on Fortune magazine’s list of “100 Best Places to Work,” and were again named the “Most Admired” company in our industry. We also earned recognition on Fast Company’s list of the world’s “Most Innovative” companies. We appreciate these honors for what they say about our people and our culture, and we are very proud of the accomplishment – especially given the challenges of the past year. That said, we recognize that honors alone do nothing to advance us toward our strategic goals. Only the hard work of our talented employees, strong leadership, and the industry’s best products can do that. With this in mind, we feel very good about where we’re headed.

That’s it for my introductory comments. I’ll now turn the call over to Greg to cover the numbers in more detail.

Gregory J. Bylsma

Thanks, Brian. Good morning everyone.

Consolidated orders were $290 million in the third quarter. This represents an increase of almost 4% compared to the prior and a seasonal decline of 16% relative to Q2 of this year.

Orders within our North American segment decreased 1% compared to Q3 last year. As Brian mentioned, our healthcare business posted strong results in the period, with order growth of 60% versus the prior year. Of course much of this increase is driven by the addition of Nemschoff to our brand lineup, but even if you exclude Nemschoff, our healthcare business posted double-digit order growth in the quarter. We also experienced a double-digit year-over-year order increase within our learning vertical market.

With a few regional exceptions, order activity has continued to lag the prior year across the majority of our North American contract furniture business. In total, orders within our core North American work vertical market decreased approximately 13% compared to Q3 last year.

Orders within our non-North American business segment increased 21% relative to last year – driven by strength in the UK, Middle East, Asia and South America. Finally, order entry within our retail business was up over 70% compared to last year.

Net sales in the third quarter were $330 million; or 7% lower than the prior year, and reflected a 4% seasonal decline from the second quarter of this fiscal year. Within our North American business segment, sales of $270 million were 9% below prior year and down roughly 5% on a sequential-quarter basis. The addition of Nemschoff to our business helped drive a double-digit percentage increase in healthcare sales compared to the prior year. Sales within our learning vertical market were also up compared to the prior year. Beyond that, we experienced year-over-year decreases in net sales across the rest of our North American segment, with the core North American work business being down approximately 16%.

Sales in our non-North American business totaled $47 million – approximately $5 million or 9.5% lower than the prior year third quarter. Relative to the second quarter of this year, non-North American segment sales were down 4%. While sales across Europe have continued to show year-to-year decreases, business levels in the Asia-Pacific region were up 25% relative to last year. Sales in Brazil were also up over the third quarter of last year.

Our retail business, which experienced a deep decline in business levels last year at this time, reported very strong sales growth this quarter. In fact, sales more than doubled in comparison to the prior third quarter of last year.

On a consolidated basis, changes in exchange rates from a year ago drove an estimated $4.5 million increase in net sales relative to this quarter last year.

Now on to gross margin. Our third quarter gross margin was 31.8% of sales compared to 29.9% in the same quarter last year. Despite a year-over-year decrease in sales of $25 million, our gross margin improved 190 basis points; driven by lower commodity costs and restructuring driven cost savings.

The commodity cost savings were derived primarily from steel and steel components. In total, we estimate this drove a $4 million to $5 million reduction in cost of goods relative to the third quarter of last year.

Compared to Q2 of this fiscal year, gross margin declined 40 basis points. As expected, lower sales and reduced production schedules in Q3 negatively impacted gross margin in the period. Production inefficiencies associated with the consolidation of the Brandrud and Nemschoff manufacturing operations also contributed to the sequential-quarter margin decline. We estimate these temporary production inefficiencies reduced our Q3 gross margin by 20 basis points relative to Q2 of this year.

We also experienced a sequential-period increase in commodity costs which drove an estimated $1 million to $1.5 million increase in direct materials relative to Q2. While the largest dollar increases were seen in steel components, the cost pressure was felt across a variety of our direct material categories.

Fewer large projects in the quarter relative to Q2 drove an overall favorable trend in price discounting on a sequential-quarter basis. This helped offset some of the increase in our direct material costs.

Based on our operating results in the third quarter, we recognized expenses totaling $300,000 within cost of goods, associated with our employee “wage recovery” program. By comparison, our second quarter gross margin included $2 million in wage recovery expenses. As a reminder, this program offers employees on reduced work schedules an opportunity to earn back their lost wages if the company achieves a certain level of profitability in a given quarter.

Operating expenses in the third quarter of $86 million were approximately flat with the prior-year level and $4 million lower than Q2 of this year. The current quarter expenses include approximately $5 million from Nemschoff. They also reflect a favorable adjustment related to the contingent value right or CVR component of the Nemschoff purchase price. This adjustment was driven by the increase in our stock price during the quarter and resulted in a $1.8 million reduction to consolidated operating expenses.

Expenses in the third quarter include approximately $800,000 related to the wage recovery program. By comparison, we recorded $3 million of wage recovery expenses in Q2 of this year.

Restructuring expenses in the third quarter of approximately $2 million related to employee severance benefits and move costs associated with our previously announced factory consolidation projects.

Operating earnings in the quarter were $17 million or 5.1% of sales. Excluding the impact of restructuring expenses, adjusted operating earnings in the quarter were $19 million or 5.8% of sales.

Our effective tax rate in the quarter was 32.8% compared to 39.4% in the prior year third quarter.

Net income in the quarter was $8 million or $0.12 per share on a diluted basis. Excluding the per-share impact of the restructuring charges, adjusted EPS was $0.15. As required under GAAP for purposes of calculating diluted EPS, we have excluded from net earnings the favorable valuation adjustment related to the CVR this quarter.

That’s the income statement overview for the quarter. Now I’ll turn the call over to Jeff to give us an update on our cash flow and balance sheet.

Jeff Stutz

Thank you, Greg. Good morning everyone.

Cash flow from operations in the quarter was approximately $8 million. Changes in working capital drove an $8 million use of funds in the period. This was the net result of decreases in trade payables and compensation-related accruals, offset in part by seasonal decreases in AR and inventory. The timing of project activity within our international vertical market drove most of the working capital use of funds in the period.

In the third quarter of last year, cash flow from operations was $19 million, with changes in working capital driving a net use of approximately $300,000 in that period.

Capital expenditures this quarter of $3.9 million were down from $4.5 million spent in the same period last year. Through three quarters of fiscal 2010, capital spend totaled roughly $15 million, and we are targeting a full-year spend of between $20 million and $23 million.

We made just over $1 million in dividend payments during the quarter. This compares to approximately $5 million in the third quarter of last year. Also, consistent with our recent practice, we made no outside share repurchases in the period.

As part of our ongoing effort to strengthen our balance sheet, this quarter we made the decision to reduce our un-funded pension liability. On February 9th, we contributed 967,000 shares of stock to the plan. These additional shares represent 1.7% of our total shares outstanding as of quarter end. The market value of these shares on February 9th was $16.7 million – an amount which drove a cash tax benefit of $5.8 million. This increase to the value of the plan’s assets will also result in a reduced pension expense run-rate going forward; making the contribution of shares non-dilutive in the near-term from an EPS perspective.

Our decision to use shares was based on our continued interest in conserving cash and reducing balance sheet risk. Doing so will help ensure our ability to meet the ongoing cash needs of the business, as well as retain the flexibility to take advantage of strategic investment opportunities.

We ended the quarter with total cash equivalents of $123 million. Of this amount, approximately $50 million is held within our international entities.

We remain in compliance with all debt covenants and are currently running at a gross debt to EBITDA ratio of approximately 2.6 times.

We also continue to have approximately $139 million of unused capacity on our revolving credit facility; with the only usage being from outstanding insurance-related letters of credit. Given our current cash balance, ongoing cash flows from operations, and borrowing capacity, we remain confident that we have sufficient flexibility to meet the financing needs of the business going forward.

That’s the balance sheet overview for the quarter.

I’ll now turn the call back over to Greg to share some thoughts on the outlook as we move through Q4.

Gregory J. Bylsma

Thanks, Jeff.

Consistent with recent quarters, we aren’t providing specific forward-looking sales and earnings guidance. However, we thought it would be helpful to share with you some general thoughts on the trends we will be looking for as we move through the fourth quarter.

The seasonal slowdown in business levels in the third quarter has historically pushed the ending backlog to the low-water point for the fiscal year. This has typically been followed by an up-tick in order entry rates that continues through the balance of the fiscal year. In past years, the sequential increase in order rates between Q3 and Q4 has ranged from as low as 4% to more than 20% though 11% to 16% is more typical. This combination of factors – a low beginning backlog and a wide ranging expectation for order entry - makes forecasting sales in Q4 very difficult. This year, our beginning backlog is $13 million lower than it was heading into Q4 of last year. Based on our historical experience, we would expect our weekly order trend to accelerate through the quarter. In fact, orders in the first two weeks of Q4 were already up 5% from the Q3 average. Ultimately, our Q4 sales level will depend on the magnitude of this acceleration over the next several weeks.

Moderate commodity pricing pressure is expected to continue through the balance of the fiscal year. We expect this to negatively impact our Q4 gross margin by between $1 million and $2 million compared to Q3; however we expect higher production levels and improved manufacturing efficiencies to at least offset this.

We are continuing to keep a close eye on trends in discount levels and while we view this as an outlook risk going forward, at this point we don’t anticipate a significant change from the third quarter.

Operating expenses generally increase in Q4, driven in large part by the completion of marketing and product development programs in advance of NeoCon. Through the first three quarters of fiscal 2010, we have done a good job of holding the line on core operating expenses and we intend to remain diligent in managing these costs going forward. Cost saving programs, including the reduced employee work schedules, will remain in place through the balance of this fiscal year.

With that, I will now turn the call back to the operator and we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you do have a question, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue you may press the pound key. Our first question comes from Mark Rupe from Longbow Research.

Mark Rupe - Longbow Research

Hey Brian, Greg and Jeff, on the contract business, I think you had cited that the orders were down 13%. Just excluding seasonality kind of the flow-through of the quarter, is that getting any better as time goes on?

Brian C. Walker

It’s what getting better, Mark, if you can tell me your point exactly?

Mark Rupe - Longbow Research

The traditional kind of corporate office environment on the furniture side, on the order side.

Brian C. Walker

I would say it’s - when we talked in the second quarter, the day-to-day stuff is getting better, it depends on where you are at. Globally, internationally per se we’ve seen improvement. Domestically, I would say it has not changed a lot yet. I think one of the things we are looking at is the question of, you know, when you go through the process that folks pull back heavily on capital expenditures, it takes a period of time in our industry and we tended to lag the general economy as folks sort of rebuild their projects, meaning architects, you can hear from them are busier now during RFPs. But those don’t show up in orders quite as fast because they got to get the work planned for those changes even if it is moving building to building. So, I think we are still in that phase of the industry where a lot of that work is going on, that people are beginning to plan their moves even if they are doing consolidations.

The other thing that you do see from Q2 to Q3 and that you have to keep up in mind is that Q2 is a heavy, heavy government period. You obviously have a little bit of backlog when you go from Q2 to Q3. You have two factors – you have the seasonality of the number of days that essentially people are working and then you also have the impact of the government heavy buying season that drops off.

So that third quarter period for us is always the most difficult to really get a good handle on.

Mark Rupe - Longbow Research

Okay. And then as it relates to the healthcare and the learning verticals, obviously, you guys do a good job there. Is there anything there that you are doing? I mean the market I''m assuming is on a relative basis performing better than maybe corporate America. But I mean it sounds like you''re doing even better than that. I''m just curious to see what kind of opportunities that you''re capitalizing on in those two verticals.

Brian C. Walker

Well, I think particularly, Mark, our focus has been to find ways to segment our efforts both by customer, by product and by geography and then align our resources around those to get a deeper understanding of a customer’s needs there and either tailor our current products or develop or acquire new products.

So I think what you are seeing is the impact of four or five years of concentrating in those areas and beginning to ask how do we build those selling resources, knowledge at the dealer level, how to target those customers and then backing that up with products.

So I think this is part of what we have been trying to do for a number of years and I think we are seeing partly the fruits of our labor there. And then second of all, those two segments have tended to have more money to spend. Now certainly the healthcare segment hasn’t been as healthy as it has been in prior periods. On the other hand, relatively, compared to the rest - compared to the office business has hung in there better.

Mark Rupe - Longbow Research

Okay. Right, okay, perfect. And then just lastly on the pricing I know you had cited you had a little bit of alleviation in the current period. As you look forward do you expect much change on the pricing front as far as it relates to the impact on margins, positive or negative?

Gregory J. Bylsma

Mark, this is Greg. In the near-term what we can see in our backlog we don’t expect a big impact in the next three or four months of shipments. But beyond that it gets pretty cloudy. But anecdotal evidence wouldn’t suggest necessarily that it is continuing to get worse.

Mark Rupe - Longbow Research

Perfect. That’s all, guys. Thank you.

Operator

Our next question comes from Todd Schwartzman from Sidoti & Company.

Todd Schwartzman - Sidoti & Company, LLC

Hi. Good morning, folks. What is your visibility on steel pricing for fiscal ''11, if I may look out that far at this point?

Brian C. Walker

I think Todd, it’s moved up quite a little faster than we would have guessed given what’s going on in the general economy already. I think this is one - Greg and I talk about this every other day that the forecast move around from further increases to it’s already been overheated and particularly in areas like aluminum folks are already talking that it may have already peaked and could be on its way back down.

I think for basic steel the issue we have got right now is it’s not that we are at a point that we have an imbalance in supply and demand in the sense of the capacity there but folks have taken capacity off to the marketplace. So, I think what’s going to be interesting to see is when do the steel producers begin to bring capacity back.

So, I think overall we are preparing ourselves and thinking through what happens in a world that we start to see prices move again. At the same time, at this point we don’t believe it is a runaway train but we are trying to make sure we are prepared on both sides of that.

Todd Schwartzman - Sidoti & Company, LLC

Great. Regarding the Brandrud, Nemschoff consolidation inefficiencies, can you maybe give a little color on the source, the nature, of those inefficiencies and how you see that playing out and when it dissipates?

Brian C. Walker

Todd, Greg will probably give you some detail. What we’ve got is - we’ve got Brandrud’s actual volume being produced and Seattle is down to very, very little. Yes, we still got the building and some of the people there because there are products that we have yet to reengineer if you will into the Nemschoff’s system. And some of that is products that maybe don’t have heavy volume but you got customers who have bought them in the past and will expect to get back to the supply level. So we are keeping extra resources around at this point. We are in a very messy spot where you begin to bring volume down and you don’t have all of the overhead and other things flushed out of the system.

And then I think on the other side of it, in Sheboygan where we moved the products of course we are still coming up the learning curve on that end as well and getting our folks in Wisconsin efficient in making those products in the same way that Brandrud was.

So, we are in the crossover period is the way I would describe it. Our belief is that we’ll get through that crossover period over the next three or four months and as we get into the summer we should get a much clearer picture of where we are at on that other side.

Todd Schwartzman - Sidoti & Company, LLC

Great. On healthcare in total, what was the organic growth rate, revenue growth rate for 3Q?

Gregory J. Bylsma

Todd, this is Greg. On the order side, it was in the neighborhood of 20%.

Todd Schwartzman - Sidoti & Company, LLC

And in terms of delivered sales?

Gregory J. Bylsma

I don’t know on top of my head.

Todd Schwartzman - Sidoti & Company, LLC

And same question for education? I don''t know if you quantified that earlier in your remarks.

Gregory J. Bylsma

We did. We typically haven’t in the past. It was in the double-digit range.

Todd Schwartzman - Sidoti & Company, LLC

Okay. Lastly, fourth quarter tax rate, anything unusual we should be thinking about there for 4Q?

Gregory J. Bylsma

I am not sure what our forecast is.

Jeff Stutz

This is Jeff. Todd, year to date, to three quarters we are 25% effective rate. We’d expect the full-year rate to probably be between 25% to 27%. We will be completing our audit by the end of the fourth quarter and there may be year end tax relative to our provision from last year as well. So we can expect the full-year rates to be between 25% and 27%.

Brian C. Walker

We ran an accelerated program with the IRS for our audit for the prior year was done relatively fast and of course with the new accounting principles once you get through the audit, a lot of those questions of bizarres (ph) have to be trued up and that is what Jeff is referring to is it we think we will complete that so the rate can move around depending on conclusion of the audit work.

Todd Schwartzman - Sidoti & Company, LLC

Sounds good. Thanks, guys.

Operator

If you have a question, please press star then one. Our next question comes from Matt McCall from BB&T Capital.

Sean Connor - BB&T Capital Markets

Good morning. This is Sean Connor for Matt. I was wondering if you could comment on Convia? I have not heard you talk about that today and how the integration or partnership with Legrand is going? Any update you could provide there?

Brian C. Walker

Sean, we are continuing to get out and train the Legrand sales force. That’s going better when you see ramp up in their prospecting list if you will with not as much conversion to orders as we would have liked. On the other hand, we have had some important customer engagements that’s impacted not only Convia but it has also helped on the furniture side where we have had customers where we can tell them the complete story of what we are trying to provide to both help them be more efficient users of space, be able to deal with their environmental requirements as well as help them look at the total ability to reduce energy. That has enabled us to win some customers that I think were just on a furniture basis. We probably wouldn’t have had the same degree of capability.

So, we are still encouraged by the work at Legrand. I think that was the right choice. Unfortunately, of course with what’s going on in the building industry, there is not that much going on in terms of construction and even retrofit so I would say the Legrand guys have not seen that great a volume on their end. On the other hand, the controls market, which is really where Convia plays is one of those that still looks like overall it has strong longer-term patterns.

Sean Connor - BB&T Capital Markets

Is the key just the continued knowledge of the product and the offering, or is it you need to see the macro - more of a macro improvement? I guess what ultimately drives more conversion rates?

Brian C. Walker

It’s both. First of all, you have to get the knowledge rate of - we have to get both the Legrand sales force knowledgeable and be able to tell the story of a programmable if you will electrical system that enables people to manage energy cost, so we have to get that story out where they can sell that effectively.

The project sizes are not large because often you get customers looking at smaller size buildings is where we play so you got very small projects, it is not any one individually that is super significant.

And I do think as the economy picks up and the building sector picks up overall that will certainly play stronger for Convia, no difference to our core business and projects and folks deciding to change things.

It is unlikely you are going to go and implement a control system in a building that you are making no changes to. Now that doesn’t mean you have to be building in a building but you probably have to be down to a level - at least to a level deciding to change the interiors before you are going to go back and make some of those changes.

Sean Connor - BB&T Capital Markets

I guess on your order patterns specifically in the non-North America; do you think that type of order pattern will be sustainable in those markets? Was there anything specific in it that helped drive that strength? Or was it just fairly broad-based improvement?

Brian C. Walker

I think it is fairly broad based. It was not in any one particular geographic market, I think as Greg noted in his comments. In the one area in particular that we have seen strength in is our seating product line which of course we have some new product lines that are not only getting us new customers because of what those products do. We have added some value points with Setu, some new areas that we haven’t traditionally played in.

So, I think what we are seeing is the benefit of the work we did to broaden our distribution for the last three to five years as well as the economy gets being stronger. So, it wasn’t specific projects that I think drove it as much as their general economic activities, in particular, even multi-nationals deciding that they believe will be the areas for growth for the future for their business so that’s where they tended to be spending more money to fit out offices and add people.

Sean Connor - BB&T Capital Markets

Then you mentioned an overall wage recovery expense in the quarter, and I missed it; I caught the SG&A piece. Could you repeat what the overall impact was?

Gregory J. Bylsma

I think the overall amount was $1.2 million.

Sean Connor - BB&T Capital Markets

And do you have a CapEx budget for next year?

Gregory J. Bylsma

I don’t know if we have a - generally I would say that our CapEx really, a couple of projects that we are looking at will cause us to go up. Right now, we are looking at probably the $30-millionish.

Sean Connor - BB&T Capital Markets

Great. Thank you, guys.

Operator

Our next question comes from Budd Bugatch from Raymond James.

Budd Bugatch - Raymond James & Associates

Brian, good morning, Greg. Good morning, Jeff. I do want to concentrate a little bit on orders. The international performance year over year was pretty strong at 21%. You said there was not a serious project win or a couple of things you could point to that really drove that kind of performance?

Brian C. Walker

No, it was pretty broad based, Budd. In fact, a lot of it was, you know the folks would say it’s a lot of base business started coming back particularly in the seating side.

Budd Bugatch - Raymond James & Associates

That is pretty encouraging, is it not?

Brian C. Walker

Yes, it is. In fact, I would say we saw a comeback in the base side, come back stronger in international than we have seen it domestically. But I do think it has a lot to do with the work John Pollack (ph) did - the broad net distribution footprint. So we are hitting both retail as well as contract through that distribution at the same time.

Budd Bugatch - Raymond James & Associates

Is there much currency impact in that number or in the sales number?

Gregory J. Bylsma

In the sales number Budd, I know the number was about $4 million to $5 million as a result of that impact.

Budd Bugatch - Raymond James & Associates

Positive impact.

Jeff Stutz

But we had to make the same amount of magnitude on the other side.

Budd Bugatch - Raymond James & Associates

And what would that have been related to in the percentage? That would have been a big number in percentage then, right?

Gregory J. Bylsma

We can do the math later on, Budd.

Jeff Stutz

It would be about 9% I think, Budd.

Budd Bugatch - Raymond James & Associates

So in other words in constant currency or local currency revenues the gain was about 12%; still better than a poke in the eye with a sharp stick, but.

Brian C. Walker

I mean if you have that overall you will be pretty happy.

Budd Bugatch - Raymond James & Associates

I think so. And when you look at order pacing, and I realize the third quarter is really difficult because of the holiday period, to figure that out. It looks like it would be on average $22 million to $24 million, depending on how many effective weeks you want to put into the quarter. What do we look like going forward now? What do we look like? You said the first two weeks were up. That would tell you like $25 million on an annual - on a weekly basis if you were at the average. But maybe it is better than that?

Gregory J. Bylsma

I think you are in the neighborhood, Budd.

Budd Bugatch - Raymond James & Associates

Okay. And when you are looking at the healthcare, retail verticals, we have never - you have never been willing to size those before for us. Are we getting closer to that kind of disclosure?

Brian C. Walker

Yes, if that perspective can help. From a retail space, relatively small. As you know, I have often talked, it is small but a profitable business for us. And to be frank when you look at international that’s sort of - when we talk about it as a vertical we are often talking domestically because actually we are playing in retail more and international as well today and that’s really - it is not large in any one area. So you don’t really see it as a concentrated thing in international but it is actually a broadening of the distribution channel in total.

Budd Bugatch - Raymond James & Associates

And so we are getting closer to sizing next quarter''s?

Brian C. Walker

Yes.

Budd Bugatch - Raymond James & Associates

We are not there yet, I take it?

Brian C. Walker

Correct.

Budd Bugatch - Raymond James & Associates

Okay, I got it. You can just poke me again. As we look at restructuring going forward - do we still have more of that to book in the fourth quarter and next year?

Gregory J. Bylsma

Budd, we still have more in the quarter. I think we estimate that the completion of both the plant consolidations will be complete as well as the rest of the severance paid out. We think that the amount is $4 million plus for the third quarter.

Budd Bugatch - Raymond James & Associates

Okay, so the $4 million will show up as a pretax restructuring expense in the fourth quarter?

Brian C. Walker

Yes, that’s our estimate right now.

Gregory J. Bylsma

We may get some of that moved from fourth to first. It is going to kind of depend on where we are in terms of getting products moved, Budd, kind of like the good stuff.

Brian C. Walker

Budd, we have a lease in the Seattle facility that we can’t restructure under GAAP until we are actually in that facility completely so that is one of the big wildcards out there.

Budd Bugatch - Raymond James & Associates

And once you do then shutter it entirely from production, you have got to maintain those costs in kind of a restructuring account until either the facility is gone or re-leased to somebody?

Gregory J. Bylsma

Yes, we book the entire remaining rent payments at the time that we exit. And then the ongoing - if there are probably small ongoing maintenance costs would book as we go.

Budd Bugatch - Raymond James & Associates

I understand. Okay. CapEx for the fourth quarter looks like $5 million to $8 million, if my math is right, for one quarter. I take it that is tooling for NeoCon. Can you talk a little bit about what we should see there?

Brian C. Walker

Yes, it is actually not only NeoCon. We have several new products in the pipeline, some of them in the healthcare arena which you will see at NeoCon. It is also new products that we will launch in the fall prior to and including order tax. So we have got some new seating products coming that we are very excited about that will give us even broader range in the seating side and we also have some new work on the office side in the more broader landscape if you will - workstation, private office that will show some of we believe in NeoCon although those things are always on the development schedule. And then there will be more of that as we get into the fall.

So with new products coming from virtually every segment. We have several new products at NeoCon. And then the other thing that is in there Budd is we have some investments in facilities, in particular some facilities for demonstrating healthcare and some facility investments here as well as in some of our showrooms. So it is a pretty heavy period compared to where we have been anyway.

Budd Bugatch - Raymond James & Associates

Sure. Okay. All right, just a couple of other quick ones. Usually I ask these. The discounting level, you say it has alleviated. You normally give us some sort of quantification of that either as impact on cost of goods or gross margin. What was the impact of discounting in the quarter?

Gregory J. Bylsma

Budd, it nearly offset the impact of our commodities. It didn’t quite, maybe it was in the 75% range of the commodity impact.

Budd Bugatch - Raymond James & Associates

Okay. And historically, you have also told us the difference between project business and day-to-day business as you measure it.

Jeff Stutz

Budd, this is Jeff. It is very similar to last quarter. We were in the low 40% for the project mix in North America. That’s what we saw this quarter.

Budd Bugatch - Raymond James & Associates

Okay. And what about the elements of cost of goods sold, which you oftentimes do give us? In terms of material, overall --

Jeff Stutz

Material cost in the quarter 40.5% of sales, directly was 7.4%, total factory overhead 14.6% and freight and distribution was just under 6%.

Budd Bugatch - Raymond James & Associates

Okay. All right, thank you very much and good luck. And I think we may be coming out of this period.

Brian C. Walker

Let’s hope so. Thanks, Budd.

Operator

If you do have a question, please press star then one. Our next question comes from Matt McCall from BB&T Capital.

Sean Connor - BB&T Capital Markets

This is Sean again. I had a quick follow-up. On the Nemschoff and Brandrud consolidation, the inefficiencies experienced, is there anything there that was not expected? Or is that just the typical type of inefficiencies that you expected? And do you still see the same type of accretion over the next year from the acquisition?

Brian C. Walker

I don’t think it is anything unexpected in terms of the category. It is always difficult to predict about how you are going to see and when you actually get in there and start moving things and you are trying to deal with various customer orders that are coming from, we saw some mix shift at Brandrud products in the quarter which of course made moving things even more difficult because you are moving when you are seeing more customer orders from it. It is a good thing you are getting orders. On the other hand, it makes the move a little more complicated when you are going out of it. So I would say nothing from a type of expense we wouldn’t have expected. It was to be frank a little heavier in terms of efficiencies and we had predicted a pre-acquistion. So that’s one of the areas that we are digging into. And so, we got great conclusions on that as we make sure how we get back to what we had originally planned for.

Sean Connor - BB&T Capital Markets

All right, great. Thank you for that detail.

Operator

If you do have a question, please press star then one. I am not showing any other questioners at this time.

Brian C. Walker

Thanks everyone for joining us on the call this morning and for your continued interest in Herman Miller. We’re encouraged by our recent performance and the good progress we’re making in our strategy, and you can be assured we will continue to work diligently to achieve still greater success for our employee-owners and you, our shareholders. We’ll look forward to talking to you again next quarter.

Operator

Ladies and gentlemen, this does conclude today’s program. You may now disconnect and have a wonderful day.